![]() ![]() The paramount object of running a business is to earn profit. Matching concept is based on the accounting period concept. Union of India reported in 13 Scale 204,it has been held that. The cash balance on the balance sheet will be credited by Rs.5 million, and the bonuses payable balance will also be debited by Rs.5 million, so the balance sheet will continue to balance. In April 21, when the bonus is paid out there is no impact on the income statement. On the balance sheet at the end of 2020-21, a bonuses payable balance of rupees 5 million will be credited, and retained earnings will be reduced by the same amount (lower net income), so the balance sheet will continue to balance. In 2020-21, the company generated revenues of 100 million rupees and thus will pay its employees a bonus of 5 million rupees in April 2021.Įven though the bonus is not paid until the following year, the matching principle stipulates that the expense should be recorded on the 2020-21 income statement as an expense of rupees 5 million. The policy is to pay 5% of revenues generated over the year, which is paid out in April of the following year. Imagine that a company pays its employees an annual bonus for their work during the fiscal year 2020-21. Depreciation is the “expensing” of a physical asset, such as a truck or a machine, over its estimated useful life. Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual outflow of cash.ĭepreciation is an example of the matching principle in action. Under the mercantile system of accounting, this matching is required to be done on accrual basis. Therefore, under the mercantile system of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses). ![]() The system postulates the existence of tax in so far as monies due and payable by the parties to whom they are debited (see Keshav Mills Ltd. The profits earned and credited in the books of account constitute the basis of computation of income. Under the mercantile system of accounting, therefore, book profits are liable to be taxed. Under the mercantile system of accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Basically, it is a double entry system of accounting. ![]() The mercantile system of accounting is based on accrual. The cause and effect relationship is the basis for the matching principle. The principle is at the core of the accrual basis of accounting and adjusting entries. I.This basic accounting principle has been a huge bone of contention in numerous matters and is an oft misunderstood concept leading to oversimplification and misinterpretation which in turn results in litigation. I.This basic accounting principle has been a huge bone of contention in numerous matters and is an oft misunderstood concept leading to oversimplification and misinterpretation which in turn results in litigation.The article proposes to explain the concept in terms of settled law by numerous SC decisions and is expected to be useful to new entrants in field of litigation law ,esp the lawyers who may not have had a formal and detailed exposure to accountancy with reference to income tax law.This is a basic exposition and the author shall welcome advanced queries on the subject.I am deeply obliged to my exposure on the subject through my adjudicatory attempts as first appellate authority specially relating to coal fields and to my senior CA colleagues with whom my endless debates over endless cups of tea in my chambers, on accountancy principles and accounting standards vis-a –vis income tax law sharpened my understanding of tax accounting inspite of not being formally instructed on the issue save and except my training days in National Academy Of Direct Taxes. ![]()
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