The matching principle is one of the accounting principles that require, as its name, the matching between revenues and their related expenses.
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.
The users who use that financial information as the reference for making the decision will become the victim.
This principle concerns the recognition of two essential elements. One is revenue, and another is related to expenses. The related expenses here refer to the expenses that occur in correlation with the revenues. But, what do we mean by related?
Here is the example,
For example, when we sell the goods to our customers, the revenue increases and decreases the inventories. The reduction of the inventories corresponding to revenues is called the cost of goods sold.
Based on the Matching principle, the Cost of Goods Sold should record the period in which the revenues are earned.
Another example is that the salesman in your company could earn some commission due to their sales performance. 5% of the sales commission will be provided to the salesman.
The commission is provided only when sales transactions are made. In December 2016, the salesman could earn 2,000$, but the commission payment will be payable in January of the following year.
How do we apply the Matching Principle for this case?
Based on the Matching Principle, even the commission is paid in January, but the commission expenses must be recognized and recorded in December 2016.
Matching principle: Matching between expenses and revenues
Examples of Matching Principle:
The following are the examples of the Matching Principle:
Assume we have sold the goods to our customers amount $70,000 for the month of December 2016. These goods have the cost of goods sold in the amount of $40,000.
Based on the Matching Principle, the cost of goods sold amount $40,000 have to be recorded in December 2016, same as revenue of $70,000 recognized. The marching principle is recognized in the same ways as accrual or cash.
The company prepares the financial statements on an accrual basis, then revenue and expenses are recognized consistently the same as cash.
For example, based on a cash basis, the revenue amount of $70,000 is recognized only when the cash is the receipt.
In this case, when we use the Matching Principle with a cash basis. Assume the revenue per cash basis is recognized in January 2017, then the cost of goods sold $40,000 should also recognize in 2017 as well.
Another example is related to depreciation expenses. The concept is that the expenses of fixed assets should not be recorded imitatively when we purchase.
But should be proportion to the economical use or in the ways how fixed assets contribute to sales revenue as well as production. The depreciation concept is consistent with the matching concept.
For example, If the fixed assets amount to $50,000 and depreciation for five years as the result of economic use. Then, the depreciation expenses amount to $10,000 per year should be recorded.
An additional similar example related to the Matching Principle is accrual salaries. Let me be more specific so that you can better understand the wages of the salesperson.
The salary expenses are the cost of services the company renders from its staff. The services rendered in which months and salary expenses should be recorded on those months.
For example, the cost of rendering service amount to $60,000 that occurred in February should be recorded as the expenses in February.
No matter these expenses are paid to employees this month or not. These expenses are matched to the services the company consumes.
Advantages of Matching Principle:
The matching principle is quite important to users of the financial statements, especially to understand the nature of expenses recorded in the entity’s financial statements.
For example, when the users use financial statements and see the cost of goods sold increases, they will note that the sales revenue should be increasing consistently.
If the revenue and cost of goods sold are increasing inconsistently, then neither of these two-figure probably have some problem. Maybe the revenue or goods of goods sold are overstated or understated.
In general, the Matching principle helps both accountants recognize the accounting transactions in some uncertain situation and users of financial transactions for using the entity’s financial information.
An accountant will recognize both expenses and revenue and then correlate even though cash flow runs inconsistently.
Written by Sinra