Why is revenue recognition principle and matching principle important

Posted on 01.06.2018 by Danny
The possibility of bad debts exists when the sale is made, so expense should be recognized right at that moment when the sale is made. In accordance with revenue recognition principle, revenue is recognized when the delivery is made. Matching Principle yields contrasting concepts by which income is recognized. Relation with Matching Principle.

Now, there is a risk that the customers may not pay the amount due against those sales, which results in the company writing off the account receivable as bad debts expense.

The net amount earned in a period, is calculated by subtracting expenses from revenues. It is important that these advance payments be recorded even if the transactions are not, as yet, fully consummated due to pending delivery or performance of the business product or trade. However, these rules indirectly relate to expense recognition because the organization must track both revenue and cost items to solve its profitability equation. Basically, revenue recognition provides a window into the rules a business follows to post income data. Regulatory guidelines also connect revenue and expense recognition when referring to the matching principle. The matching principle, one of the cornerstones of accrual accounting, seeks to match the expenses and revenues with the accounting periods in which they are incurred or earned. We hope this has been a helpful guide to understanding the revenue recognition principle, examples of how it works, and why its very important in accounting.
Accounting logic requires that the monies received as advance payments be initially recorded as business liabilities. Importance of this principle lies in the fact that earnings can be traced back to the exact accounting period irrespective of whether the cash is pre-received or outstanding. While revenue recognition has nothing to do with the matching principle, both concepts often interrelate. Revenue recognition before and after delivery. As in any accounting concept and principle, the best way to explain them is by way of examples which we present in the succeeding sections. As such, it is a conclusive explanation that combines all aspects of accrual accounting including that of revenue recognition.