Question

What is the matching principle? Give multiple examples of “good” matching prescribed by GAAP and an example of “bad” matching prescribed by GAAP. What concerns justify “bad matching”, or pre-empt good matching?

Answer 1

Matching principle is one of the accounting principles that require, as its name, the matching between revenues and their related expenses that occur as the result of those revenues to be recognize in the same period in the financial statements. The related expenses here refer to the expenses that occur in correlation with the revenues. For example, the when we sell the goods to our customers, we got revenue and we reduce the inventories. The reduce of the inventories in correspond to revenues is called cost of goods sold.

An important concept of accrual accounting, the matching principle states that the related revenues and expenses must be matched in the same period. This is done in order to link the costs of an asset or revenue to its benefits.

EXAMPLE OF GOOD MATCHING PRINCIPLE

The expense must relate to the period in which they were incurred rather than on the period in which they were paid. For example, if a business pays a 10% commission to sales representatives at the end of each month. If the company has $50,000 in sales in the month of December, the company will pay the commission of $5,000 next January.

The matching statement requires that the commission expense is reported in the December income statement. If the company uses the cash basis of accounting, the commission would be reported in January (in the month they were paid) rather than December (the month they were incurred).