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Overview of Matching Principle
Definition of
Matching Principle
What is the Matching Principle? The Matching Principle is a fundamental concept in accrual accounting that dictates that expenses incurred by a business must be recorded in the same accounting period as the revenues they helped generate. This ensures that the Income Statement accurately reflects a company's profitability for a specific period by showing the direct relationship between the costs of generating revenue and the revenue itself. For example, the Cost of Goods Sold (COGS) is matched with the sales revenue from those goods in the same period.
Activities Related to
Matching Principle
Here is a list of Matching Principle related activities:Â
Recording Cost of Goods Sold (COGS) in the same period as the related sales revenue, Accruing commission expenses in the period sales are made, even if commissions are paid later, Recognizing warranty expenses in the period products are sold, not when claims are paid, Allocating the cost of long-term assets (like equipment) as depreciation expense over their useful lives as they help generate revenue, and Making adjusting entries at the end of an accounting period to ensure all revenues and related expenses are correctly matched.
This principle is a cornerstone of reliable financial statement preparation.
The Importance of
the Matching Principle
The Matching Principle is important because it provides a more accurate and realistic picture of a company's profitability during a specific period. By aligning expenses with the revenues they helped produce, businesses can avoid distorting their financial results (e.g., by expensing all costs in one period while the related revenue is recognized over several periods, or vice versa). This leads to more meaningful financial statement analysis, better-informed decision-making by management, and greater comparability of financial information over time and between different companies. It is a key tenet of GAAP.
Key Aspects of
Matching Principle
Cause-and-Effect Relationship
Links expenses directly to the revenues they helped to generate within the same accounting period.
Accrual Basis Foundation
A core component of accrual accounting, contrasting with cash-basis accounting where expenses are recorded when paid.
Accurate Income Measurement
Aims to provide a more accurate reflection of a company's net income (or loss) for a specific period.
Requires Adjusting Entries
Often necessitates the use of adjusting entries at the end of an accounting period to correctly recognize accrued expenses or allocate prepaid expenses.
Concepts Related to
Matching Principle
The Matching Principle is closely related to the Revenue Recognition Principle; together they form the foundation of Accrual Accounting. It ensures that the Income Statement accurately reports profitability by matching Cost of Goods Sold (COGS) and other Expenses with the Revenue of the same period. It is a requirement under Generally Accepted Accounting Principles (GAAP).
Matching Principle
in Action:
The Adventures of Coco and Cami
Coco sells a lot of sandwiches in July. Professor A explains that the cost of the bread and fillings used for those July sales should also be recorded as an expense in July, not when she bought them in June.
Learn with Coco and Cami how the Matching Principle helps them accurately see how much profit they made in a specific month by ensuring costs are matched with the sales they helped generate.