Matching Principle Definition + Concept Examples

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. HighRadius Autonomous Accounting Application consists of End-to-end Financial Close Automation, AI-powered Anomaly Detection and Account Reconciliation, and Connected Workspaces. Delivered as SaaS, our solutions seamlessly integrate bi-directionally with multiple systems including ERPs, HR, CRM, Payroll, and banks.

For clear and easy tracking, it's ideal that both of them fall within the same time period. This principle works with the concept that a business must incur expenses to earn revenues. The matching principle requires that expenses should be matched to revenues earned during an accounting period. The accrual principle recognizes revenues and expenses in the period they are earned/incurred, while the matching principle requires expenses to be recognized in the same period as related revenues. The former focuses on timing, while the latter links expenses to revenues. The revenue recognition principle is another accounting principle related to the matching principle.

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For example, a company consumes electricity for the whole month of January, but pays its electricity bill in February. So if the company has been operating under “cash based accounting”, they may have recorded the expense in the month of February, as it has actually paid cash in February. But under “accruals accounting” the entity is bound to record the electricity expense for the month of January and not February, because the expense has originally been incurred in January. The matching principle is an accounting concept that dictates that companies report expenses at the same time as the revenues they are related to. Revenues and expenses are matched on the income statement for a period of time (e.g., a year, quarter, or month). By applying the matching concept, accountants aim to achieve consistency and accuracy in financial reporting.

For example, a business spends $20 million on a new location with the expectation that it lasts for 10 years. 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. Product cost − These are tied directly to products and in turn revenues.

• While accrual accounting is not a flawless system, the standardization of financial statements encourages more consistency than cash-based accounting.
• Assume that a business gives out commissions to its representatives at 10% of their sales, disbursed at the end of the month.
• So, the expenses incurred for online search ads are recorded in the period of the expense rather than dispersed over a period of time.
• The matching principle is an essential concept in accounting that requires a company to report expenses in the same period as their corresponding revenue.

The cash balance on the balance sheet will be credited by $5 million, and the bonuses payable balance will also be debited by $5 million, so the balance sheet will continue to balance. For example, a company may decide to construct a new office building to increase employee productivity. There is no direct way to attribute these costs to increased profits by increasing employee productivity. As a result, the company amortizes the cost of the building over its useful life. While matching primary accounting accurately portrays the organization's finances, it frequently overlooks the consequences of inflation. This concept states the obvious assumption that the accounting transaction recorded should be objective, i.e. free from any bias of the person recording it.

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Thus, revenue is recognized when cash is received, and supplier invoices are recognized when cash is paid. This means that the matching principle is ignored when you use the cash basis of accounting. 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.

It shares characteristics with accrued revenue (or accrued assets) with the difference that an asset to be covered latter are proceeds from a delivery of goods or services, at which such income item is earned. The related revenue item is recognized, while cash for them is to be received later when its amount is deducted from accrued revenues. Therefore, if the company used "cash-based accounting", it might have recognized the expense in February because it paid in cash in February. However, under "accruals accounting," the firm must record the power charge in January rather than February because the item was incurred in January. One of the most important ideas in accrual accounting is the principle of matching. The matching idea states that the expenses documented in a company's financial accounts must be matched to the revenues made during the same period.

The Matching Principle in Accounting: Achieving Consistency

For example, you may purchase office supplies like pens, notebooks, and printer ink for your team. The expense must relate to the period in which the expense occurs rather than on the period of actually paying invoices. 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.

Matching Principle for Employee Bonuses

The matching concept implies that expenditure incurred during an accounting cycle should match revenue collected during that timeframe. Overall, the matching concept brings accuracy, transparency, and reliability to financial reporting. It enables businesses to present a more meaningful stock options representation of their financial performance, aids decision-making, and promotes consistency and comparability in financial statements. By following this concept, companies can effectively communicate their financial position to stakeholders and build trust in the marketplace.

The matching principle is a fundamental concept in financial reporting that allows accountants to match a company’s expenses with its corresponding revenues in the same accounting period. This ensures that financial statements are prepared by following the generally accepted accounting principles (GAAP) and accurately reflect a company’s financial performance. For instance, if a company makes a sale in December but receives payment in January of the following year, the sale’s revenue is recognized in December by applying the matching concept in accounting. When it comes to financial reporting and accounting, accuracy and consistency are crucial. The matching concept is a fundamental principle that helps ensure that financial statements accurately reflect a company’s financial performance over a specific period of time.

Is the Matching Principle Used Under the Cash Basis of Accounting?

But by utilizing depreciation, the Capex amount is allocated evenly until the PP&E balance reaches zero by the end of Year 10. As shown in the screenshot below, the Capex outflow is shown as negative $100 million, which is an outflow of cash used to increase the PP&E balance. If we assume a useful life assumption of 10 years and straight-line depreciation with a residual value of zero, the annual depreciation comes out to $10 million. Let’s say a company just incurred $100 million in Capex to purchase PP&E at the end of Year 0. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.