Accounting – 4.3 Other payables and other receivables | e-Consult
4.3 Other payables and other receivables (1 questions)
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Matching costs with revenues is a fundamental principle of accrual accounting and is crucial for providing an accurate picture of a business's financial performance. Here's why it's important:
- Accurate Profitability Assessment: Matching ensures that expenses incurred to generate revenue are recognized in the same period as the revenue itself. This provides a more realistic and accurate measure of profitability. Without matching, profits could be artificially inflated or understated.
- Better Decision-Making: Accurate profit figures are essential for informed decision-making. Managers need to know which products or services are most profitable and where costs can be controlled. Matching helps identify these areas.
- Compliance with Accounting Standards: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) require matching costs and revenues. This ensures comparability between businesses and across different accounting periods.
- Tax Implications: Profitability, as determined by matching costs and revenues, is a key factor in calculating taxable income. Accurate matching ensures accurate tax reporting.
For example, a company might incur advertising costs in December to generate sales in January. If these advertising costs were not matched with the January revenue, the company's profit would be misrepresented.