Definition and Explanation
Matching principle is a natural extension of accounting period principle. Since performance must be measured in terms of a period, it is important that revenues and costs that are included in the income statement of a particular period do really belong to that period and correspond to each other. If we include any revenue in a particular period, we should be sure that:
- it has been earned in the period in whose income statement it has been included. This means that all resources needed to earn this revenue have been used, all steps needed to earn this revenue have been taken and there is no apparent reason for this revenue not being received by the business.
- Whatever costs have been incurred for the purpose of earning that revenue are included in the expenses for the period in which the credit for the income is taken.
According to this concept, the incomes or revenues of a particular period must be matched with the expenses of that particular period. Most of the businesses record their revenues and expenses on annual basis which means regardless of their time of receipts of payments. The requirement of this concept is allocation of cost on different accounting periods so that only relevant incomes and expenses are matched. This comparison will give the net profit or loss for that particular accounting period.
For example, if any goods have been sold in a particular period, the first test is to ensure that the goods have been delivered, or otherwise placed at the disposal of the buyer and/or their title has been passed on to the buyer so as to create a legal obligation for the buyer to pay for them.
The second aspect is that the full cost of those items must be included in that particular period’s income statement. Similarly, if a fee is earned for providing any services, the first test is to ensure that the service in question has been duly provided and the second aspect is that all expenses incurred by the business to enable it to provide that service are duly accounted for in the income statement for the period in which the credit for the fee is taken.