What is Matching Principle?
The Matching principle of accounting states that expenses are recorded with the income that is generated from those expenses. In other words, expenses are matched with revenues.
The sale of merchandise has two aspects –
- Revenue aspect – It reflects an increase in retained earnings which is equal to the amount of revenue realized.
- Expense aspect – It reflects the decrease in retained earnings because the merchandise has left the business.
In order to measure correctly this sale’s net effect on retained earnings in a period, both of these aspects must be recognized in the same accounting period. This leads to the matching principle.
When a transaction or event affects both revenue and expenses, the effect should be recorded in the same accounting year. While applying matching concept, firstly the items of revenues are recognize for the period and their amount. Then cost of items are matched with the revenues.
Example of Matching Concept
Suppose a goods costing Rs 5,000 are sold for Rs 7,500. It is first determine when 7,500 is reasonably certain to be realized. Then 6000 which is the cost of sales is matched with those revenues and expenses resulting in 1,500 income from the sale.
However, there are occasions when applicable expenses are identified first, and then revenues are matched to them. In such situations, we assume that applicable revenues of period have been identified. The problem is to determine the costs that match with these revenues. These matched costs are expenses of the period.