Accounting principles are intended to make accounting an objective process. The realization and matching principles are two such guidelines that solve accounting issues regarding the measurement and presentation of a business's financial performance.
The realization principle answers the question, "When is business revenue realized?" The principle states that revenue can be recorded when the earning process is complete and objective evidence exists regarding the amount of revenue earned. For example, revenue is earned when services are provided or products are shipped to the customer and accepted by the customer. In the case of the realization principle, performance, and not promises, determines when revenue should be booked.
Realization Principle Example
A product is manufactured and sold on credit. According to the realization principle, the revenue is recognized at the time of the sale.
The matching principle requires that expenses incurred to produce revenue must be deducted from revenue earned in an accounting period to derive net income. In this way, business expenses are matched with revenue. The matching principle also requires that estimates be made, based on experience and economic conditions, for the purpose of providing for doubtful accounts. This provision leads to a reduction of gross revenue to net realizable revenue to prevent the overstatement of revenues.
Matching Principle Example
A product is manufactured, sold on credit and the revenue is recognized at the time of the sale. To match the expenses of producing the product with the revenues generated by the product, the expenses and revenues are recognized simultaneously.
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- "Fundamentals of Corporate Finance"; Parrino, et al.; 2008
Billie Nordmeyer works as a consultant advising small businesses and Fortune 500 companies on performance improvement initiatives, as well as SAP software selection and implementation. During her career, she has published business and technology-based articles and texts. Nordmeyer holds a Bachelor of Science in accounting, a Master of Arts in international management and a Master of Business Administration in finance.