Business Analysis with Microsoft® Excel, Second Edition

Matching Costs and Revenues

Several other chapters of this book discuss the matching principle—the notion that revenue should be matched with whatever expenses or assets produce that revenue.

This notion leads inevitably to the accrual method of accounting. If you obtain the annual registration for a truck in January, and use that truck to deliver products to your customers for 12 months, you have paid for an item in January that helped you produce revenue all year long.

To record the entire amount of the expense in January causes you to overstate your costs, and understate your profitability, for that month. It also causes you to understate your costs, and overstate your profitability, for the remaining 11 months.

It is largely for this reason ...