What is the matching principle in accounting?

The matching principle requires income and the expenses incurred in earning it to be recognised in the same accounting period, regardless of when cash is received or paid. It follows from the accrual basis, which records income when earned and expenses when incurred. Year-end adjustments for accruals, prepayments, depreciation and doubtful debts exist to apply the matching principle so the profit reflects the correct period.

How do you adjust for an accrued and a prepaid expense?

An accrued expense is an amount owing at the year end for a service already used; it is added to the expense in the income statement and shown as a current liability (accrued expense) in the statement of financial position. A prepaid expense is an amount paid in advance for a service not yet used; it is subtracted from the expense and shown as a current asset (prepayment).

What is the difference between an irrecoverable debt and an allowance for doubtful debts?

An irrecoverable debt (bad debt) is a specific debt known to be uncollectable; it is written off by debiting irrecoverable debts and crediting the customer. An allowance for doubtful debts is an estimate of debts that may not be paid; it is created or adjusted against profit and offset against trade receivables in the statement of financial position, without removing any specific debt.

Why are year-end adjustments necessary?

Adjustments apply the matching principle so that the profit for the year includes all the income earned and all the expenses incurred in that year, not just the cash received and paid. Without them, accruals and prepayments would distort the expense figure, the cost of non-current assets would not be spread over their useful lives, and the receivables figure would overstate amounts likely to be collected.

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Adjustments and the matching principle: O-Level Principles of Accounts (SEAB/Cambridge 7087), covering the matching principle and accrual basis, accrued and prepaid expenses, accrued and prepaid income, depreciation by the straight-line and reducing-balance methods, and irrecoverable debts and the allowance for doubtful debts

Q: What is the difference between the straight-line and reducing-balance methods of depreciation?

The straight-line method charges an equal amount each year, calculated as cost minus residual value divided by useful life, giving a constant charge. The reducing-balance method applies a fixed percentage to the net book value each year, so the charge is higher early on and falls over time. Straight-line suits assets used evenly; reducing-balance suits assets that lose value fastest when new.

An O-Level Principles of Accounts (SEAB 7087) overview of year-end adjustments: the matching principle and accrual basis, accrued and prepaid expenses and income, depreciation by the straight-line and reducing-balance methods, and writing off irrecoverable debts and the allowance for doubtful debts.

Generated by Claude Opus 4.87 min readSEAB-7087Updated 2026-06-13

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Why the year end needs adjusting
The principle and the accruals adjustments
Depreciation and doubtful debts
Check your knowledge

Why the year end needs adjusting

Cash rarely lines up neatly with the period in which income is earned and expenses are incurred. This module of O-Level Principles of Accounts (SEAB/Cambridge 7087) is about closing that gap: the matching principle is the idea, and accruals, prepayments, depreciation and doubtful debts are the adjustments that put it into practice. These adjustments are some of the most heavily tested skills in 7087 because they flow straight into the financial statements, so accuracy here pays off twice.

This guide links the five dot points of the module. The subject hub is at /sg-o-level/accounting and the syllabus index at /sg-o-level/accounting/syllabus.

The principle and the accruals adjustments

The matching principle dot point explains the accrual basis and why adjustments are needed. The accrued and prepaid expenses dot point shows how to adjust an expense for amounts owing or paid in advance, and the accrued and prepaid income dot point does the same for income earned but not received, or received in advance.

Depreciation and doubtful debts

The depreciation of non-current assets dot point covers the straight-line and reducing-balance methods. The straight-line charge is

\text{annual depreciation} = \frac{\text{cost} - \text{residual value}}{\text{useful life}},

while the reducing-balance method applies a fixed percentage to the net book value each year. The irrecoverable debts and allowances dot point covers writing off a known bad debt and creating or adjusting an allowance for doubtful debts.

Depreciation by both methods, then an allowance for doubtful debts

step 1: straight-line depreciation

A machine costs $\text{S\textdollar}48{,}000$ , has a residual value of $\text{S\textdollar}3{,}000$ and a useful life of $9$ years.

\text{annual depreciation} = \frac{\text{S\textdollar}48{,}000 - \text{S\textdollar}3{,}000}{9} = \frac{\text{S\textdollar}45{,}000}{9} = \text{S\textdollar}5{,}000 \text{ per year}.

step 2: reducing-balance depreciation, year 1

Using the same machine with a $20\%$ reducing-balance rate, year 1 charge $= 20\% \times \text{S\textdollar}48{,}000 = \text{S\textdollar}9{,}600$ . Net book value at the end of year 1 $= \text{S\textdollar}48{,}000 - \text{S\textdollar}9{,}600 = \text{S\textdollar}38{,}400$ .

step 3: reducing-balance depreciation, year 2

Year 2 charge $= 20\% \times \text{S\textdollar}38{,}400 = \text{S\textdollar}7{,}680$ , lower than year 1, which shows the falling charge typical of the method.

step 4: allowance for doubtful debts

Trade receivables are $\text{S\textdollar}40{,}000$ and the business creates a $2\%$ allowance for doubtful debts. Allowance $= 2\% \times \text{S\textdollar}40{,}000 = \text{S\textdollar}800$ . Debit irrecoverable debts (or increase in allowance) $\text{S\textdollar}800$ in the income statement; show the allowance of $\text{S\textdollar}800$ as a deduction from trade receivables in the statement of financial position.

This module applies the matching principle: income and the expenses that earned it are recognised in the same period, regardless of cash, which is why year-end adjustments exist. For an expense, charge the amount relating to the year (cash paid, plus accrued, less prepaid); accrued amounts are current liabilities and prepaid amounts current assets, with income mirrored. Depreciation spreads an asset's cost over its life: straight-line charges $\tfrac{\text{cost} - \text{residual value}}{\text{useful life}}$ each year, while reducing-balance applies a fixed percentage to the net book value, giving a falling charge. An irrecoverable debt is written off against profit, and an allowance for doubtful debts is estimated against profit and deducted from trade receivables.

Check your knowledge

A mix of recall and calculation questions across the module. Work each fully, then check against the solutions.

State the matching principle. (2 marks)
Rent paid during the year was $\text{S\textdollar}12{,}000$ , but $\text{S\textdollar}1{,}000$ is still owing at the year end. State the rent charged to the income statement and how the $\text{S\textdollar}1{,}000$ is shown. (3 marks)
Insurance paid during the year was $\text{S\textdollar}4{,}800$ , of which $\text{S\textdollar}400$ relates to next year. State the insurance charged and how the $\text{S\textdollar}400$ is shown. (3 marks)
A vehicle costs $\text{S\textdollar}30{,}000$ , has a residual value of $\text{S\textdollar}6{,}000$ and a useful life of $8$ years. Calculate the annual straight-line depreciation. (2 marks)
Equipment with a net book value of $\text{S\textdollar}20{,}000$ is depreciated at $25\%$ reducing balance. Calculate this year's depreciation charge. (2 marks)
Distinguish between writing off an irrecoverable debt and creating an allowance for doubtful debts. (3 marks)

Solutions

Q1: Income and the expenses incurred in earning it are recognised in the same accounting period, regardless of when the cash is received or paid.
Q2: Rent charged $= \text{S\textdollar}12{,}000 + \text{S\textdollar}1{,}000 = \text{S\textdollar}13{,}000$ . The $\text{S\textdollar}1{,}000$ owing is an accrued expense, shown as a current liability in the statement of financial position.
Q3: Insurance charged $= \text{S\textdollar}4{,}800 - \text{S\textdollar}400 = \text{S\textdollar}4{,}400$ . The $\text{S\textdollar}400$ paid in advance is a prepayment, shown as a current asset.
Q4: Straight-line depreciation $= \dfrac{\text{S\textdollar}30{,}000 - \text{S\textdollar}6{,}000}{8} = \dfrac{\text{S\textdollar}24{,}000}{8} = \text{S\textdollar}3{,}000$ per year.
Q5: Reducing-balance charge $= 25\% \times \text{S\textdollar}20{,}000 = \text{S\textdollar}5{,}000$ .
Q6: Writing off an irrecoverable debt removes a specific debt known to be uncollectable, by debiting irrecoverable debts and crediting the customer. An allowance for doubtful debts is an estimate of debts that may not be paid; it is charged against profit and deducted from trade receivables, without removing any specific debt.

Sources & how we know this

Principles of Accounts (Syllabus 7087) — Singapore Examinations and Assessment Board (2026)
Singapore-Cambridge GCE Ordinary Level (joint SEAB and Cambridge examination) — Singapore Examinations and Assessment Board / Cambridge Assessment International Education (2026)