What Is the Matching Principle and Why Is It Important?
Matching principle is the accounting principle that requires that the expenses incurred during a period be recorded in the same period in which the related revenues are earned. This principle recognizes that businesses must incur expenses to earn revenues.
The principle is at the core of the accrual basis of accounting and adjusting entries. It is a part of Generally Accepted Accounting Principles (GAAP). The matching principle is based on the cause and effect relationship. If there’s no cause and effect relationship, then the accountant will charge the cost to the expense immediately.
What this article covers:
What Is the Matching Concept in Accounting?
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 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).
Apart from commissions, some other examples of matching principles are:
- Employee bonuses
What Is Revenue Recognition Principle?
The revenue recognition principle is an accounting principle that requires the revenue be recognized and recorded when it is realized and earned, regardless of when the payment is made. In other words, businesses don’t have to wait to receive cash from customers to record the revenue from sales.
For example, if you’re a roofing contractor and have completed a job for a customer, your business has earned the fees. This is regardless of when the customer pays you for the job.
What Are the Benefits of Matching Principle?
The primary reason why businesses adhere to the matching principle is to ensure consistency in financial statements, such as the income statement, balance sheet etc.
Recognizing the expenses at the wrong time may distort the financial statements greatly and provide an inaccurate financial position of the business. The matching principle helps businesses avoid misstating profits for a period.
For example, an expense that is recognized earlier than it is appropriate results in a lower net income.
Certain financial elements of business also benefit from the use of the matching principle. Long-term assets experience depreciation. The matching principle allows an asset to be distributed and matched over the course of its useful life in order to balance the cost over a period.