Throughout this report I will explain the advantages, disadvantages and give examples of the Cost Principle, Matching Principle, as well as the Revenue Recognition principle, which are all Generally Accepted Accounting Principles used in today's financial world. Each of these individual principles is unique in their structure and purpose, and all have different applications in today's world of accounting. The Cost, Matching, and Revenue Recognition Principle's are all very different in the way they effect financial statements as well as other aspects of accounting.
The Cost Principle:
The Cost principle states that assets or anything that is purchased should be recorded on the books at cost. (Weygandt et al, Accounting Principles Second Canadian Edition, 581)
The Cost Principle requires assets and goods that have been purchased be recorded at cost, not market or current value. This can make accounting entries much simpler than they would be if you purchased something for a certain price, but recorded it at a different price on the books. Cost is a very relevant number because it represents the amount paid, or what assets were sacrificed in order to obtain what was purchased. Cost is also a very reliable number because it represents exactly what was paid at the date of acquisition, regardless of market value or what you feel you could sell the asset for. We use cost as the basis for preparing our financial statements because it is a Generally Accepted Accounting Principal that is reliable and relevant to the value of our assets. (Weygandt et al, Accounting Principles Second Canadian Edition, 575) (http://www.marketvolume.com/glossary/m.asp, December 20)
The value of assets however, does not always remain at cost. They can fluctuate due to such factors as inflation and depreciation. One way we compensate for this is by using amortization accounts. If the value of our asset has decreased, we continue to have the asset recorded at cost, we simply credit the depreciated amount to an amortization account set up to balance out the actual value of the asset.
In 1997 your business purchases a brand new automobile for
$35 000, you record the automobile in your books at cost (35 000). In 2002, you go back to your books and see that your automobile is still recorded at $35 000, even though it is only worth $18 000. In order to compensate you have an "Accumulated Amortization - car" account with a credit balance of $17 000. This shows that you can still have the asset recorded at cost, while only being worth market value.
The Matching Principle:
The Matching Principle states that expenses should be matched with revenues in the fiscal period that the revenue is produced. The Matching Principle has often been called the Expense Recognition Principle. (Weygandt et al, Accounting Principles Second Canadian Edition, 582)
When you use the matching principle you do not recognize the expenses you are encountering when you actually pay...