Of the total amount spent on production of goods, the part relevant to the stock still on hand is shown in the Balance Sheet the remaining amounts stand debited to the Profit and Loss Account. On the basis of the application of the matching principle, of the total amounts spent, certain amounts are shown in the Profit and Loss Account and are treated as expenses or losses the remaining amounts are shown in the Balance Sheet as assets.įor example, of the amount spent on machinery, a part is debited to the Profit and Loss Account as depreciation and the balance only shown in the Balance Sheet. However, heavy losses of such a nature may be spread over three or four years the amount not charged to the profit and loss account will be shown in the balance sheet. For instance, if an asset is destroyed by fire, its book value, less the amount recoverable from the insurers, should be debited in the profit and loss account. It should be noted that losses, against which no revenue is earned or expected to be earned, should be charged off to the profit and loss account in the year in which they are incurred. (iii) If an amount of a revenue nature is received but against it service is to be rendered or goods are to be supplied in future, the amount must not be treated as revenue this year but only next year-this year, it will be shown as a liability. To treat this amount as an expense will be to unduly deflate the current year’s profits-properly this amount should be debited to the Profit and Loss Account next year when the income will also be credited. Similarly, to take another example, suppose a printing press incurs cost totaling Rs 15,000 on jobs not yet complete and therefore not yet billed to the customers. The proper thing to do is to treat 3 months’ subscriptions as income for 2010-2011 and 9 months’ subscriptions should be carried forward to 2011-2012 and shown in the Balance Sheet (as on March 31, 2011) to indicate that these subscriptions have been received and will involve supply of nine issues. Suppose a company, closing its books each year on March 31, producing a monthly journal, receives annual subscriptions in January, 2011 and treats these as income.This will lead to distortion of the picture since nine issues in 2011-2012 will have to be supplied without any further amount being received the net effect is that the income of 2011-2012 is being transferred to 2010-2011. According to matching principle, the revenues and the relevant expenses incurred should be correlated and matched so that a complete picture is available.

Matching principle