Accounting – 4.3 Other payables and other receivables | e-Consult
4.3 Other payables and other receivables (1 questions)
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The matching principle requires the company to recognize the cost of the raw materials (£5,000) in the same period as the revenue generated from the sale of the finished goods (£12,000). Since the goods were sold in 2024, the £5,000 cost should be recognized as an expense in 2024.
Impact on Financial Statements:
- Income Statement: The income statement will show a reduction in profit of £5,000 in 2024. The profit would be £12,000 (revenue) - £5,000 (cost of goods sold) = £7,000.
- Balance Sheet: The raw materials would initially be recorded as a non-current asset (stock) on the balance sheet in 2023. As the materials are consumed and become part of the finished goods, the cost is transferred to the cost of goods sold on the income statement.
Failing to apply the matching principle would result in an inaccurate representation of the company's profitability in 2024. It would appear as though the company made a much larger profit than it actually did.