The Matching Concept of Smith Company

667 Words3 Pages
Introduction In this text, I prepare an income statement for Smith Company. In so doing, I will in addition to highlighting the necessary adjustments also explain the relevance of the matching concept. Smith Company Income Statement For the Year Ended 31st Dec 2012 Revenue $406,000 Less C.O.G.S $279,500 G/P $126,500 Less expense Depreciation expense $24,350 Insurance $1,400 Marketing $4,500 Property taxes $8,900 Rent $18,000 Salaries $67,500 Utilities $6,700 $131,350 N/P ($4,850) Workings C.O.G.S $234,000 Add back closing stock $45,500 $279,500 The Matching Concept: Its Importance The matching principle in the words of Nikolai, Bazley and Jones (2009) "states that to determine the income of a company for an accounting period, the company computes the total expenses involved in obtaining the revenues of the period and relates these total expenses to (matches them against) the total revenues recorded in the period." In that regard, this principle recommends that revenues and expenses (associated with the said revenue) be recognized in the same accounting period. For this reason, the relevance of this concept in the accrual basis of accounting cannot be overstated. In the section below, I explain the importance of this concept. To begin with, it is important to note that the matching concept helps to avert earnings misstatement. For instance, failure to report costs associated with a certain period's revenues would most definitely result in a
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