Business Analysis with Microsoft® Excel, Second Edition

Managing with Accrual Accounting

Accrual accounting involves two steps: identifying the revenues for a given period, and matching the associated costs to those revenues. This is called the matching principle and is a basic concept that is used throughout the accounting process.

The notion of matching revenues to costs might seem obvious, but it has some subtle implications. Suppose that you purchase license plates for a company vehicle. You pay $400 for the plates in January. You write off the full $400 in January (that is, you show it as a cost that you incurred fully during that month). You produce revenue or otherwise conduct business by using your vehicle both during January and during the next 11 months.

In this case, you have overstated ...