Matching Principle as a Concept - Essay Example

For example, prepaid insurance is paid for a longer period than one year so, only the expired portion of the prepaid insurance is charged in the income statement. The matching principle states that the prepaid expenses should be apportioned in the period to which they belong or in other words expenses should be recognized not when they are paid but when they are used to generate revenue (Stahl, 2004). The remaining balance of the prepaid expenses should appear in the balance sheet until they are recognized in the income statements.

Unearned Revenue:
Unearned revenues are the revenue of the prepaid expenses. Every entity which prepays an expense before the benefit is actually realized, another entity receives the revenue for which the services have not been rendered these are called unearned revenues or deferred revenue (Jay S. Jefferson P Jones, 2011). For example, the courier services receive the payment in advance and they record it as deferred revenue until the delivery of the courier. The matching principle regarding the unearned income states that only those revenues should be recognized for which the entity has incurred expenses and the rest should be shown as a liability because the company is not yet untitled to recognize them.

Operating Expenses:
Operating assets are expected to benefit the organization in more than one accounting period that is why they are classified under long-term/fixed assets in the balance sheet. The most common examples of operating assets are building, tools, furniture, and equipment, etc. The matching principle states that the benefit obtained from the operating assets should be realized on some logical basis over the asset’s useful life. The application of the matching principle on operating assets is a little more complex than the prepaid assets and unearned revenue because the pattern of the benefits realization is difficult to understand. For example, some assets give more benefits in the early years so the appropriate expense should be charged based on the benefits realization pattern. The reducing balance method is most commonly used to compute the depreciation expense. Other methods include a straight-line method and the sum of the year digit method. Read More