The matching principle of accounting is a natural extension of the accounting period principle. Since performance must be measured in terms of a period, it is important to ensure that revenues and costs that are included in the income statement of a particular period do really belong to that period and correspond to each other. If we include any revenue in a particular period, we should be sure of two key facts. First, that the revenue has been earned in the period in which it is included in the income statement. This means that all resources needed to earn this revenue have been used, all steps needed to earn this revenue have been taken, and there is no apparent reason for this revenue not being received by the business. The second fact is that all costs that have been incurred for the purpose of earning the revenue should be included in the expenses for the period in which the credit for the income is taken. According to the matching principle of accounting, the incomes or revenues of a particular period must be matched with the expenses of that particular period. Most businesses record their revenues and expenses on an annual basis, which happens regardless of the time of receipts of payments. The requirement for this concept is the allocation of cost to different accounting periods so that only relevant incomes and expenses are matched. This comparison will give the net profit or loss for that particular accounting period. The realization and accrual concepts are essentially derived from the need to match expenses with revenues earned during an accounting period. Since all transfers of goods are considered to be sales for the period during which such transfers take place, we have to carefully trace the expenses for producing the goods actually sold, if we are to determine the profit earned out of such sales. In other words, the earnings or revenues and the expenses shown in an income statement must both refer to the same goods transferred or services rendered to customers during the accounting period. Sometimes, expenditures are incurred either in advance or subsequent to the accounting period even though they relate to expenses for goods or services sold during the current accounting period. In such cases, the careful determination of such expenses has to be made and appropriate adjustments will be required in order to determine the proper profits (or loss) for the current accounting period. The matching principle, then, requires that expenses should be matched to the revenues of the appropriate accounting period and not the other way around. Consequently, the first step must be to determine the revenues earned during a particular accounting period and then to identify the expenses incurred, thereby determining the revenues earned during that accounting period. The usual accounting practice is that any expenses that cannot be traced to specific revenue-generating goods or services are charged as expenses in the income statement of the accounting period in which they are incurred. Obviously, the general manager's salary and those of other administrative staff cannot be related to a specific product. Accordingly, they are charged as expenses in the income statement of the accounting period in which the salaries are paid. Such expenses are called period expenses. They are distinct from product expenses, which are related to products. If any goods have been sold in a particular period, the first test is to ensure that they have been delivered or otherwise placed at the disposal of the buyer. Otherwise, the title should have been passed onto the buyer so as to create a legal obligation for the buyer to pay for them. The second aspect is that the full cost of those items must be included in that particular period's income statement. Similarly, if a fee is earned for providing a service, the first test is to ensure that the service in question has been duly provided. The second aspect is that all expenses incurred by the business, enabling it to provide the service, should be duly accounted for in the income statement for the period in which the credit for the fee is taken.Matching Principle: Definition
Matching Principle: Explanation
Example
Matching Principle of Accounting FAQs
The matching principle requires that expenses should be matched to revenues earned during an accounting period.
This concept applies to all kinds of business transactions involving assets, liabilities and equity, revenue and expense recognition.
Period expenses and product expenses.
The matching concept requires that expenses should be matched with revenues earned during a particular accounting period.
The matching principle, also called the "revenue recognition principle," ensures that expenses are recorded in the correct period by relating them to the revenues earned in the same period.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
