![]() ![]() You should record the commission expense in January, so that the expense is recognized in the same month as the associated sale.Ī company acquires production equipment for $100,000 that has a projected useful life of 10 years. ![]() The commission of $5,000 is paid in February. Matching Principle for CommissionsĪ salesman earns a 5% commission on sales shipped and recorded in January. Several examples of the matching principle are noted below, for commissions, depreciation, bonus payments, wages, and the cost of goods sold. Instead, when revenues are reported, all associated expenses are also reported at the same time. Doing so ensures that the reporting of profits is not artificially accelerated or delayed in any reporting period. This is one of the most essential concepts in accrual basis accounting, since it mandates that the entire effect of a transaction be recorded within the same reporting period. If there is no cause-and-effect relationship, then charge the cost to expense at once. In some cases, it will be necessary to conduct a systematic allocation of a cost across multiple reporting periods, such as when the purchase cost of a fixed asset is depreciated over several years. Thus, if there is a cause-and-effect relationship between revenue and certain expenses, then record them at the same time. However, if this concept were not in place, managers could flagrantly add intangible assets to the financial statements that have little supportable basis.The matching principle requires that revenues and any related expenses be recognized together in the same reporting period. In short, the money measurement concept can lead to the issuance of financial statements that may not adequately represent the future upside of a business. The reverse is typically not the case, since management is encouraged by the accounting standards to disclose all current or potential liabilities in the notes accompanying the financial statements. Thus, it is entirely possible that the key underlying advantages of a business are not disclosed, which tends to under-represent the long-term ability of a business to generate profits. The only exception would be a discussion of pertinent items that management includes in the disclosures that accompany the financial statements. The key flaw in the money measurement concept is that many factors can lead to long-term changes in the financial results or financial position of a business (as just noted), but the concept does not allow them to be stated in the financial statements. ![]() Problems with the Money Measurement Concept Or, if employee working conditions are poor, this leads to greater employee turnover, which increases labor-related expenses. For example, a high level of customer support will likely lead to increased customer retention and a higher propensity to buy from the company again, which therefore impacts revenues. The efficiency of administrative processesĪll of the preceding factors are indirectly reflected in the financial results of a business, because they have an impact on either revenues, expenses, assets, or liabilities. ![]() The quality of customer support or field service Examples of items that cannot be recorded as accounting transactions because they cannot be expressed in terms of money include: Thus, a large number of items are never reflected in a company's accounting records, which means that they never appear in its financial statements. This means that the focus of accounting transactions is on quantitative information, rather than on qualitative information. The money measurement concept states that a business should only record an accounting transaction if it can be expressed in terms of money. ![]()
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