The Matching Principle in Accounting

For example, Radius Cloud sold $10,000 worth of products in December 2022 but incurred $5,000 in related expenses in January 2023. Without the matching principle, their financial statements would have been inconsistent. By recognizing those expenses in December 2022, they maintained consistency and accurately reflected the company’s financial performance. If the costs are expected to have no future benefit beyond the current accounting period then the full amount should be immediately recognized as an expense. Expenses of this type include items such as the production costs relating to faulty goods which cannot be sold, research costs and general expenses. Rent is normally a period cost which does not vary in relation to the revenue of the business.

Helps determine the company’s financial status by keeping financial statements consistent

This means that the matching principle is ignored when you use the cash basis of accounting. The matching principle of accounting dictates that expenses should be recognized in the same period as the corresponding revenue they generate. If an expense is not directly tied to revenues, the expense should be reported on the income statement in the accounting period in which it expires or is used up. If the future benefit of a cost cannot be determined, it should be charged to expense immediately. The accrual principle recognizes revenues and expenses in the period they are earned or incurred, while the matching principle requires expenses to be petty cash recognized in the same period as related revenues.

Allows depreciation and amortization costs to be spread out over time

This alignment prevents the misrepresentation of profits and losses, ensuring that financial statements are reliable and consistent from one period to the next. Now that you’ve seen an example, it is worth noting the matching principle is fundamental to double-entry bookkeeping and forms a cornerstone of modern accounting practices. When applied correctly, this principle of accounting helps businesses accurately record their financial information for a specific period of time. The expenses correlated with revenues should be recognized in the same period in the financial statements. This concept tries to ensure that there are no over or under revenue or expenses records in the financial statements. If the revenue or expenses are recorded inconsistently, then there will be over or under income or expenses.

#1 – Accrued Expenses

This revenue was generated by the activities of the sales agents and the matching principle in accounting requires the matching of the sales commission expense to this revenue. The matching principle  requires that revenues and any related expenses be recognized together in the same reporting period. Thus, if there is a cause-and-effect relationship between revenue and certain expenses, then record them at the same time. In some cases, it will be necessary to conduct a systematic allocation of a cost across multiple reporting periods, such as when the purchase cost of a fixed asset is depreciated over several years. If there is no cause-and-effect relationship, then charge the cost to expense at match accounting once.

The matching principle states that all expenses incurred during a business’s fiscal year should be matched with the corresponding revenue earned from the sale of products or services. This helps ensure accurate financial reporting by creating a correlation between expenses and income, which results in a more realistic view of the company’s financial performance. The Matching principle is often used to determine the appropriate time to recognize revenue and expenses in a company’s financial statements.

Record to Report

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For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing. The accounting matching principle is a fundamental concept you’ll use forever in accounting. It’s one of the building blocks to understanding harder and more complex topics in accounting. Thank you for reading this guide to understanding the accounting concept of the matching principle.

• For information pertaining to the registration status of 11 Financial, please contact the state securities regulators for those states in which 11 Financial maintains a registration filing.
• Luckily, the products sell out on September 5th for a revenue of $30,000 (100 units X $300 sales price).
• All the expenses should be recorded in the period’s income statement in which the revenue related to that expense is earned.
• In February 2019, when the bonus is paid out there is no impact on the income statement.

The business then disperses the $20 million in expenses over the ten-year period. If there is a loan, the expense may include any fees and interest charges as part of the loan term. This disbursement continues even if the business spends the entire $20 million upfront. It may last for ten or more years, so businesses can distribute the expense over ten years instead of a single year. For example, if you’re a roofing contractor and have completed a job for a customer, your business has earned the fees. Finance Strategists has an advertising relationship with some of the companies included on this website.