As far as accounting is concerned, everything here follows a relative boundary. It is not like something visible but, pretty much evident. In this part we will discuss such a boundary known as the matching concept.
This one states about the system in which we record our entity’s revenues and expenses. Believe it or, not- without proper knowledge of this you will not be able to go even an inch in accounting arena, because, if you can’t record your revenue or, expense properly then how come you will get into recording all into accounts?
Now, get an overview of this concept:
“The balance, which derives from assessment of the professional accounts personnel within the company, may be accrued, advanced or, from previous year; should be added to or, deducted from the relevant account.”
This concept looks like unknown from its outset and more so this seems rather under explained in its definition. So, look through the cases to get the best understanding:
XYZ co. records its revenues and expenses in such form:
Some additional information (It is expected that you have already gone through all the previous installments and so we have used a bit lax language over here):
Previous year (accrued) $1000
Previous year (advance) $500
Current year (accrued) $200
Current year (advance) $700
So, what will be the actual revenue for this year?
Add: Advance (previous) $500
Accrued (current) $200
Less: Advance (current) $(700)
Accrued (previous) $(1000)
See over here. The result is derived by adding some and subtracting some. Why is that?
The amount that is from previous year, if accrued, can be earned in cash in current year and if earned then this overstates the actual amount which is earned in this year. So, this gives a perfect view if it gets subtracted from the revenue amount. Now, coming to the accrued portion of the current year, this is added and the reason behind this is- the revenue, which is not earned, is supposed to be earned this year and even though it was not earned in cash, it would be added to the revenue amount to show the actual amount. Because, without the amount being added or, subtracted; it is not possible to get the amount that is, in total, earned this period.
According to the same explanation, this revenue is reflected without the amount advanced for next year and with the amount advanced from the previous period, because, this amount is advanced for this year.
You get a view of what is added or, subtracted and why. This is really a necessary portion to get what is going on. Watch the next portion:
Now, hope that everything is explained nice and clean. If it is not, then try reading all and get to know deeply all the things.
You are now accustomed to all the things you need to know about recording, calculating and summarizing these according to the concept.