Question

What are the advantages and disadvantages of the matching and revenue recognition principles from the perspective of a business owner/manager?

Answer 1

1. The biggest advantage for a business owner from the matching concept is that all expenses incurred on generating the revenue in any given period have to be reported in the same year in which such revenues are reported. This is regardless of whether such payments are actually made or not. Hence this is based on accrual system of accounting principle. This is more congruent and accurate as it reports very much correct financial performance of the business, thus reflecting actual position of its financial position and its financial obligations.

2. The revenue recognition principle clearly contains the set of rules to recognize any income generated by sale of goods and services and report them even before the actual cash is received or not. Hence under this principle, the business recognises all those revenues which it has earned though not received. Thus it helps the business to report actual business revenue it generated during the period and also the right to receive the money it earned and is yet to receive. This helps the business to report correct revenue position as well as its financial position (ie, receivables).