Question

What are the advantages and disadvantages of the matching principle and the revenue recognition principles from an investor's perspective?

Answer 1

MATCHING PRINCIPLE

Advantages-

1. Helps in conducting more useful business analysis to the investors.

2. Helps in planning process and providing exact information to the investors by accounting all expenses and revenue within the right period .

3. Providing the correct profit/ loss balance.

Disadvantages-

1.Confusion coming with this accounting practice can lead to deception of financial statements. Eg - some businesses have misused the concept to hide weaknesses and mistakes within their financial reports. Simply put, it can be used to hide fraud.

2. Not capable to provide the right cash profit/loss to the investors.

3. Inappropriate information to the investors, when the income & expenses are recorded on period basis irrespective of of whether they have already led to inflow/outflow of resources or not.

REVENUE RECOGNITION

Advantages-

1. Providing exact knowledge to the contractor by helping in recognising the income under exact period. Hence provides correct information to the investors.

2. By leveraging the revenue recognition principle, the co maintains a steady balance if cash going out and revenue coming in. So that the investor can take a reasonable decision whether to invest or not.

Disadvantage-

If the revenue recognition system is not computerised than it may lead to human errors because it is complex principle to apply. It can cause the financial statements to reflect a wrong and errorful results. Hence may cause the investor to take wrong decision for the investment.

(I helped you up to my full knowledge, hope this is helpful)