The One Accounting rule every FP&A Analyst needs to know
A mistake I see junior FP&A colleagues make again and again is this: They try to memorize all the accounting rules that apply to their job. And then when it’s crunch time, and a tricky month-end-close problem needs to be solved immediately:
They can’t remember the rule they need.
The reason they forget is not that they have a terrible memory. It’s because they don’t understand why the rule exists in the first place. Remembering anything is easier if we thoroughly understand it.
There is an accounting rule I call the Golden Rule of Accounting because if you understand it, others suddenly start to make sense. And as a result, they are much easier to remember.
The rule I’m talking about is the Matching Principle.
It states that benefits (revenues) must be matched with their corresponding cost (expenses). “Matched” in the accounting sense means they need to be reported in the same period, typically the same month. This rule helps explain many others.
Here are some real-life examples:
❓Question: When should I accrue for the cost of the TV ad we paid for this month?
❗️Answer: In the month the ad first airs.
Why: Because expenses and the benefit (revenue generated by the ad) need to be in the same period
❓Question: Our customer just paid for the annual plan of the software license but he won’t have access to it until next month. When do I report the revenue?
❗️Answer: One-twelfth of the revenue next month and then the same amount each month until the annual license ends.
Why: We make the software available for one year, meaning we have expenses for one year. According to the matching principle, the revenue needs to be allocated equally over the same period.
There are many more accounting rules that we can deduce from the Matching Principle.
That’s why I call it the Golden Rule of accounting.
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