The matching principle prescribes Continue Correct. ($44,000 (current tax) less than $4,000 (deferred tax) - $40,000 $4,000 of the estimated current tax tax relates to prepaid income, therefore, $4,000 must be deducted from tax expense and in respect of accounting profits earned next year. that, in the receipt of income, the costs incurred to receive these revenues must be reported during the same reporting period (same income reporting). This principle is central to accounting, the method required by GAAP, since the method of accounting simply reports costs when paying. The principle of comparison relates to the comparison of income recognized during this period with expenditures that resulted in income under the accounting accrual method so that the net result is fairly reported during that period. Since it is sometimes difficult to link income to the costs used to generate it, general guidelines are used to compare costs with income. The principle of conformity and cause and effect The clearest and simplest example of cost-matching with income is the cause and effect of the relationship illustrated in the value of goods sold and income. When a product is sold, the most direct cost incurred is the cost of the product. In the case of the Solar Sunglasses Store, when Solar sells sunglasses for $50, the direct cost of sunglasses incurred to create a sale was $15 paid for sunglasses. The $15 value of the goods sold is recognized with a $50 sale so that the proceeds and expenses incurred to obtain the sale are reported, or consistent, in the same period. The principle of compliance and systematic and rational distribution In the absence of such a direct link between cause and effect of GAAP requires a systematic and rational method of distributing the value of the asset used to generate income over several years. These other costs are more closely related to specific accounting periods. For example, buying an asset with an estimated useful duration of five years may be related to the income it helped to generate over the same five years. The relationship between the value of an asset and the income it generates may be unclear, but the estimated lifespan of an asset and the periods it benefits can be systematically and rationally measured. Asset amortization is a distribution method that is used to allocate value and useful time of use of an asset in relation to income, from its use. If the asset was purchased for $100,000, instead of reporting a one-time expense of $100,000, thus outsing the income for the first year and years during which no expense is accepted for future earnings, the relevant principle requires that depreciation distribute the value of the asset during the useful time of the asset. In this case, an asset of $100,000 with a ten-year lifespan and no salvage cost would allocate and match the $10,000 depreciation expense over ten years in relation to those incomes over the same accounting periods. Therefore, the purpose of depreciation costs is to distribute the value of the asset over its lifetime with the income it helped to obtain. This method of distribution prevents short-term incomes for one year and overstatement in subsequent years by appropriately comparing reported revenues with the costs incurred to generate that income over the same period. Similarly, prepaid expenses are recognized when consumed. When Sunny purchased the $2,400 insurance policy for the year and published the January earnings report, only $200 that was consumed in January was reported as an insurance expense for profit. The balance of $2,200 remained on the balance sheet as prepaid expenses for the remainder of the year. The application of the principle of distribution compliance prevents short-term incomes and overstatement in subsequent years by appropriately comparing reported revenues with expenditures incurred to generate that income over the same period. Examples of costs recognized as systematic and rational distribution include: depreciation costs for plant, property and equipment amortization of intangible assets Distribution of prepaid expenses such as rent and insurance Compliance principle and immediate recognition If the above measurement principles are not suitable for expenses, the costs are spent during the period in which they are incurred. These include costs for which there is no clear future benefit, no benefit is defined, and costs for which a distribution method cannot be developed. For example, general administrative costs and salaries in different departments are not easy to determine with future incomes, and are thus immediately spent during the period they are incurred. Immediate recognition also includes accrued expenses, such as wages and rents incurred during this period but not yet paid. Accrued expenses are recorded in the process of adjusting records in order to compare the expenses incurred but not paid with the income earned during that period. Expenses or expenses? Expenses are monetary costs, while expenses are part of the cost, with income for that period. In accordance with the principle of comparison, expenses are reported with income, and not necessarily with the entire expense for that period. In the example above, 100,000 The U.S. paid for the equipment is the initial cost. $100,000, however, is not the expense used to generate income for the same period in year one. Rather, $10,000 allocated against the For each period of the asset's life it is an expense. Similarly, the costs and expenditures of goods with future benefits are classified as prepaid assets and converted into expenses as they are consumed. Back from the principle of compliance to accounting conditions The homepage of the online accounting Small Business Accounting HomePage Appropriate Principle is one of the fundamental fundamental principles in accounting. The relevant principle will make companies account for costs in their earnings report for the period during which the relevant income is received. It also makes it a liability to be on the balance sheet at the end of the reporting period. The principle of comparison relates to the accrued basis of accounting and adjustment of records. If expenses are not directly tied to income, expenses must be reported in the income report during the reporting period in which it expires or is spent. If the future cost benefit cannot be determined, it should be charged with costs immediately. Examples of the principle of conformity to illustrate the relevant principle, let's assume that the sales of the company are made entirely through sales representatives (representatives) who earn 10% commission. Commissions are paid on the 15th day of the month following the calendar month of sales. For example, if a company has $60,000 in sales in December, the company will pay a commission of $6,000 on January 15. The relevant principle requires that $6,000 commission costs be reported in a December earnings statement along with corresponding December sales of $60,000. It also requires that the December 31 balance report be the current liability of $6,000. This is called accrual and is achieved by adjusting the record from December 31 that debit commissions cost $6,000 and loan commissions paid for $6,000. (Without conformity to the principle and adjustment of entry, the company may report a $6,000 commission cost in January, not in December, when costs and liability were incurred.) The value of goods sold by a retailer or manufacturer is another example of costs that are comparable to sales through cause-and-effect relationships. Not all expenses and expenses have a cause and effect of the connection with income. Thus, the principle of comparison may require a systematic allocation of costs over accounting periods during which costs are spent. Thus, if a company buys a sophisticated office system for $252,000, which will be useful within 84 months, the company must report a $3,000 depreciation expense for each of its monthly earnings reports. If the future cost benefit cannot be determined, it should be charged with costs immediately. For example, the entire cost of television advertising, displayed during the Olympics, will be charged advertising costs in the year when the ad is shown. March 28, 2019 2019/ Stephen Bragg's relevant principle requires that income and any related expenses be recognized together during the same reporting period. Thus, if there is a causal and effective relationship between income and certain expenses, then write them down at the same time. If there is no such relationship, then charge the bill immediately. This is one of the most important concepts in accrual accounting because it requires that the full effect of the transaction be registered during the same reporting period. Here are some examples of conformity to the principle: the Commission. The seller earns 5% commission on sales shipped and registered in January. The $5,000 commission is paid in February. You must lock in commissions in January. The company purchases production equipment for $100,000, which has a projected lifespan of 10 years. It must charge the cost of equipment for depreciation costs of $10,000 per year for ten years. Employee bonuses. Under the bonus plan, the employee receives a $50,000 bonus based on measurable aspects of her work throughout the year. The bonus is paid next year. You must write down the bonus costs during the year when the employee earned it. Wage. The period of pay for hourly workers ends on March 28, but workers continue to receive wages until March 31, which is paid to them on April 4. The employer must fix the expenses in March for those salaries earned from March 29 to March 31.