Question

Differentiate between the terms matching and netting

Answer 1

To begin with these are Financial Accounting Terms. Matching is an accounting principle henceforth proves that for every debit the counter part will be a credit. The parties involved could be from bilateral to multi-lateral. But in the case of Netting, parties involved generally belong within one single group. We'd come across the term Netting mostly in Forex Currency Trading and Hedging.

To exemplify, Netting is a method that's used to decrease the credit risk exposure faced in Risky Contracts.Occurs within the same currency to trade off in between two transactions. Traders usually use this technique to close a losing order with a gaining order to achieve no loss sometimes. One advantage with netting off is that it reduces the number of steps involved in the process and also helps in reducing the transaction costs.

Matching is an accounting principle, which further explains that for every revenue there is an expense that's tagged to it. Length of the period is very important to tag an expense with it's revenue counterpart. On a different length of the period we'd treat it as an Accrual. The advantage to record such is to avoid overstating the earnings and to bring the perfection to the financial statements we'd prepare for a company.

To exemplify, you'd record the entry of cost of goods sold against the Inventory sold and cash being received within the period but not for the unsold inventory.