Accounting Question - about matching rule?

For all types of LT assets, the matching rule requires that revenue produced by the assets be matched with the expense related to the assets, which can be maintenance, repairs or depreciation. So if the assets are expected to bring in revenue over 5 yrs, you spread the cost of the asset over 5 yrs by charging one-fifth as depreciation each year.

Different long-term assets have varying useful lives. And so the matching principle says that you must match revenues and expenses against the useful lives of the assets involved.

Let's look at the depreciation of an asset (piece of equipment) with a 3 year useful life. Assume we use straight-line, where each yearly depreciation amount is the same. And that depreciation amount is $100 per year.

So each year, for 3 years, we'll have a depreciation expense for this asset of $100. The matching principle dictates that we cannot continue to depreciate it beyond 3 years. Why not? Because it's life is over!

In other words, accounting views this asset as having expired and no longer having value. So we'll no longer have this $100 depreciation expense after the 3 year lifespan has passed.

But another asset, say a building for instance, could have a different useful life. In other words, it's useful life could be 20 years. The matching principle would demand that we match the building's revenues and expenses to it's useful life.

So we'd be depreciating it over 20 years under straight-line depreciation. That matches the depreciation to the building's useful life.

So with long-term assets, each one can have a different useful life. And so the matching principle says you'll need to match each individual asset's lifespan to it's revenues and expenses.

Going back to my example of a piece of equipment, with a 3 year useful life and a building with a 20 year lifespan, here's how the matching principle would come into play.

For three years, we could be depreciating both the building and the equipment. But after that, the equipment's life is over, yet the building's continues. And so, we'd continue depreciating the building in years 4 to 20. But we would no longer be depreciating the equipment. It was fully-depreciated by the end of year 3.