What is the Matching Principle in Accounting? Explained

Rent is normally a period cost which does not vary in relation to the revenue of the business. Since there is an expected future benefit from the payment of rent the matching principle requires that the cost is spread over the rental period. As there is no direct link between the expense and the expense: definition types and how expenses are recorded revenue a systematic approach is used, which in this case means allocating the rent expense equally over the time period to which it relates. Understanding the matching principle is crucial for accounting functions as it enables businesses to accurately report their financial performance.

What is the revenue recognition principle?

For instance, Radius Cloud runs a one-month advertising campaign with upfront expenses, but the resulting revenue from increased product sales is realized over several months as customers respond to the campaign. The mismatch in timing makes the implementation of the matching principle difficult. Revenue recognition is complex due to factors such as project completion timing and revenue allocation for different product parts. Businesses primarily follow the matching principle to ensure consistency in financial statements. Investors typically want to see a smooth and normalized income statement where revenues and expenses are tied together, as opposed to being lumpy and disconnected.

Double Entry Bookkeeping

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. If the revenue and cost of goods sold are increasing inconsistently, then neither of these two-figure probably have some problem. An additional similar example related to the Matching Principle is accrual salaries.

Reduces the chance of reporting incorrect profits during a specific accounting period

Conduct regular reviews of your financial statements to assess the alignment between expenses and revenues. Identify any discrepancies or potential issues and take corrective actions to ensure proper matching. While accrual accounting is not a flawless system, the standardization of financial statements encourages more consistency than cash-based accounting. The purpose of the matching principle is to maintain consistency in the core financial statements — in particular, the income statement and balance sheet. However, the matching principle matches expenses with the revenue they helped generate, as opposed to being recorded in the period the actual cash outflow was incurred.

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. 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, 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. In short, the matching principle states that where expenses can be matched with revenues, we should do so because the benefits of an asset or revenue should be linked to the costs of that asset or revenue.

• This concept tries to ensure that there are no over or under revenue or expenses records in the financial statements.
• The cost is not recognized in the income statement (also known as profit and loss or P&L) during the payment period but is recorded as an expense in the period when the goods or services are actually received.
• An additional similar example related to the Matching Principle is accrual salaries.

Sippin Pretty pays its employees $19 an hour to produce their signature teacups. Luckily, Sippin Pretty just sold all of the teacups recently produced by its employees. Matching lets you book expenses that directly connect to revenue and that indirectly affect revenue. For instance, the matching principle works equally well when booking employee wages as it does with equipment depreciation. For example, the cost of rendering service amount to $60,000 that occurred in February should be recorded as the expenses in February. Another example is that the salesman in your company could earn some commission due to their sales performance.

Most businesses record their revenues and expenses on an annual basis, which happens regardless of the time of receipts of payments. HighRadius offers a cloud-based Record to Report Software that helps accounting professionals streamline and automate the financial close process for businesses. We have helped accounting teams from around the globe with month-end closing, reconciliations, journal entry management, intercompany accounting, and financial reporting. Non-cash items such as depreciation, amortization, and stock-based compensation don’t involve actual cash outflows or inflows, making it difficult to match them precisely with the related revenues.

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The matching principle, also known as the expense recognition principle, is a fundamental concept in the field of accounting. It states that expenses should be recognized in the same period as the revenues they help generate. This principle ensures that financial statements accurately reflect the relationship between revenues and the expenses incurred to generate those revenues. The matching principle requires expenses to be recognized in the period in which the related revenues are earned. Accrued expenses are recognized when incurred, regardless of payment timing. This ensures expenses are matched with revenues generated, providing accurate financial reporting.