Expense recognition – matching principle

Under accrual accounting, expenses recognition is based on the matching principle.

Matching principle

• If the expenses are tied directly to generating the revenue, recognize them in the same period as the revenue
• If the expenses are NOT tied directly to generating the revenue, recognize them in the period they incurred, e.g. administrative costs.
• For long-lived assets, the cost must be matched with revenue in form of depreciation or amortization expenses.
• For goods on credit or warranty, required to estimate bad-debt expense / warranty expenses.

Implication:

• delay expenses recognition increase net income and is more aggressive.