In other words, expenses must be reported at the same time as the revenues from which they will be deducted. Even though the bonus is not paid until the following year, the matching principle stipulates that the expense should be recorded on the 2018 income statement as an expense of $5 million.” In 2018, the company generated revenues of $100 million and thus will pay its employees a bonus of $5 million in February 2019. The policy is to pay 5% of revenues generated over the year, which is paid out in February of the following year. “Imagine that a company pays its employees an annual bonus for their work during the fiscal year. The Corporate Finance Institute puts it this way: Matching Principle: This principle requires companies to report expenses at the same time as the related revenue.This means revenue is recognized only when a service has been fully completed or when a product is in a customer’s possession. It requires companies to recognize revenue on their income statements, not when they receive payment (cash accounting), but after the revenue is actually earned (accrual accounting).
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