Problem

Matching Principle
Assume that a company purchases merchandise for resale on December 20, 2014. The merchandise is still on hand on December
31, the company’s year-end. On January 12, 2015, the merchandise is sold to a customer. Explain how the merchandise will be
treated on any of the financial statements at year-end. In which year will revenue from the sale be recorded? In which year will
cost of goods sold expense be recorded?

Step-by-step solution

1. Step 1 of 2
As per matching concept cost has to be shown in the period, in which related revenues are earned.
Comment

2. Step 2 of 2
The purchase of merchandise is treated as follows in various situations:

Date Treatment

December 20, 2014 Cost included in purchases

December 31, 2014 Cost shown as inventory on hand

January 12, 2015 Shown as cost of goods sold

Explanation:
Since the material was purchased on 20th December 2014, it is included in purchases.
Since it was not sold in the financial year 2014, it should be included in the closing stock.
The merchandise was sold on 12th January 2015. As the merchandise was sold in the financial year 2015, it
should be included in the year 2015 as revenue earned. The cost of inventory is included in the cost of goods
sold.