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Simple English definitions for legal terms
matching principle
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A quick definition of matching principle:
The matching principle is a way of making sure that expenses are deducted in the same year that they are incurred. This means that if something is used over a period of time, like a piece of equipment, the cost of using it is spread out over that time. The matching principle makes sure that the tax benefit of deducting that expense is also spread out over the same period of time.
A more thorough explanation:
The matching principle is a method used in taxation to handle expense deductions. It involves matching the depreciation of an asset in a given year with the associated tax benefit.
For example, let's say a company purchases a machine for $10,000. The machine has a useful life of 5 years, so the company can deduct $2,000 per year in depreciation expenses. The matching principle ensures that the tax benefit of the $2,000 deduction is spread out over the 5-year useful life of the machine.
Another example is when a company pays for employee salaries. The matching principle ensures that the expense of paying the salaries is matched with the revenue generated by the employees' work during that same period.
The matching principle is important because it helps to accurately reflect a company's financial performance and ensures that expenses are properly accounted for in the correct period.