Discuss the matching principle and how it applies to recognizing expenses. Why is the matching principle currently under attack?

Question

What will be an ideal response?

Answer 1

ANSWER:
Expenses are costs that expire as a result of generating revenues. Some expenses can be directly identified with either specific revenue or specific time periods. However, many important expenses cannot be so identified. The process of recognizing cost expiration for categories such as depreciation, cost of good sold, interest, and deferred charges is called matching. Matching implies that expenses are being recognized on a fair and equitable basis relative to the recognition of revenues.

Matching is currently under attack because the historical cost approach often tends to substantially understate expense measurements relative to the value of expired-asset services. Also the systematic and rational methods employed under GAAP tend to be extremely arbitrary.