The matching principle is an accounting principle that requires expenses to be reported in the same period as the revenues resulting from those expenses. In other words, the matching principle recognizes that revenues and expenses are related. Businesses must incur costs in order to generate revenues.
The matching principle simply states that related revenues and expenses should be matched in the same period. So an expense should be recorded in the same period as the corresponding revenue. Let's take a look at an example.
When retail stores allow customers to take additional and extended lines of credit with their stores, the customers tend to purchase more merchandise. That's why just about every department store offers its own store credit card. In a sense, these extended terms help generate extra sales. This means that any costs associated with these extended terms should be recognized and recorded as the revenues are recorded.
One expense that retailers that offer credit to customers is bad debt. Not all customers actually pay off their store credit cards. Sometimes store can't collect the money and have to write off the receivable as a bad debt because it will never be collected.
There are two main ways to account for bad debts: the direct write off method and the allowance for doubtful accounts method. The direct write off method doesn't match revenues and expenses because the bad debt isn't recorded until the account becomes uncollectible. At this point the revenues have already been recorded. The allowance method does a much better job matching and recording the corresponding revenues and expenses.
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