Question

Matching principle

Answer 1

Definition: Matching Principle

Matching principle is an important concept of accrual accounting which states that the revenues and related expenses must be matched in the same period to which they relate. Additionally, the expenses must relate to the period in which they have been incurred and not to the period in which the payment for them is made. For example, a company consumes electricity for the whole month of January, but pays its electricity bill in February. So if the company has been operating under “cash based accounting”, they may have recorded the expense in the month of February, as it has actually paid cash in February. But under “accruals accounting” the entity is bound to record the electricity expense for the month of January and not February, because the expense has originally been incurred in January.

Matching principle is one of the most fundamental concepts in accrual accounting. In simple terms matching concept means, in relation to a given time period, the expenses that are recorded in the financial statements of a company must be related to the revenues generated in the exact same period. This treatment of revenues and expenses makes it sure that the whole effect of a transaction is reported in the same corresponding reporting period. Another aspect to consider is that, when both the revenues and the expenses must be recognized?

The Matching Principle states that all expenses must be matched in the same accounting period as the revenues they helped to earn.

In practice, matching is a combination of accrual accounting and the revenue recognition principle. Both determine the accounting period in which revenues and expenses are recognized.

One of the basic accounting principles; it is followed to create a consistency in the income statements, balance sheets, etc.

Financial statements may be greatly distorted if expenses are recognized earlier rather than later and vice versa; jeapordizing the quality of the statements and providing an unfair representation of the financial position of the business.

For example:

• Recognizing an expense earlier than is appropriate lowers net income
• Recognizing an expense later than appropriate raises net income.