PP&E, unlike current assets such as inventory, have a useful life assumption greater than one year. capital expenditures (CapEx) - is considered to be a long-term investment. When a company acquires property, plant & equipment (PP&E), the purchase - i.e.
One of the most straightforward examples for understanding the matching principle is the concept of depreciation. Fill out the form below to access the file: Now that we’ve defined the concept of the matching principle, we can complete a simple modeling exercise in Excel.
The purpose of the matching principle is to maintain consistency in the core financial statements - in particular, the income statement and balance sheet. However, the matching principle matches expenses with the revenue they helped generate, as opposed to being recorded in the period the actual cash outflow was incurred. In contrast, cash-basis accounting would record the expense once the cash changes hands between the parties involved in the transaction. The matching principle, a fundamental rule in the accrual-based accounting system, requires expenses to be recognized in the same period as the applicable revenue.įor instance, the direct cost of a product is expensed on the income statement only if the product is sold and delivered to the customer. Per the matching principle, expenses are recognized once the income resulting from the expenses is recognized and “earned” under accrual accounting standards.