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The Matching Concept Can Help You Calculate ROI

Author : Bill Gerber
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One of the standard practices in GAAP principles (generally accepted accounting principles) is the use of the matching concept. This goes hand in hand with accrual based accounting, and helps businesses measure the ROI of a specific project.

The cash-based method of accounting may not paint a clear picture of your company’s current financial state or provide an accurate financial forecast. In cash based accounting, expenses related to a project may not be incurred (and recorded) in the same time frame as the income from that project. This could make it look like a project or initiative was more profitable than it actually was because you’re not considering the associated expenses. 

Understanding the Matching Concept

On the other hand, the “matching concept” literally matches income with the expenses incurred to earn that income. In other words, materials or services related to a specific project will be reported in the same time frame as the income earned for that project—even if you had the materials on-hand already or are deferring payments for the services. When you (or, more accurately, your professional bookkeeper) log these expenses, it will be at the cost you paid for them.

On paper, the matching concept of accounting sounds fairly simple. However, there are several challenges inherent in the accrual concept. It can be difficult, for instance, to get a clear picture of how much cash you actually have on hand. Additionally, you might pay taxes on revenue you haven’t collected yet.

GAAP Principles Provide Consistency
Even with these drawbacks, following GAAP principles and using the matching concept permits more consistent bookkeeping. Because these are the nationwide standards followed by nearly all mid-to-large-size businesses and most SMBs, it permits a better basis to compare your company to others in your industry.

Need help with matching and accrual concepts? Why not call AccountingDepartment.com today?

 
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