Matching principle is one of the fundamental accounting concepts and has great importance as well. It emphasizes that expenses should be recorded in the period in which the related revenues are earned. The application of this principle invalidates the cash basis recording of expenses in which accountants are required to record expenses when cash is paid. Matching concept also prohibits the recording of advance expense payments as an expense in the income statement.
Examples
- A simple example for matching principle is the depreciation charge during the year. As the economic benefit is obtained every year from the asset, the related depreciation expense is charged in the accounts to match revenue and expenses.
- Cost of goods sold is charged in the income statement in the period in which it is sold. So, a related sales revenue and cost of goods sold is recorded over the matching concept.
- A company sells goods and services on credit to its customers. It may record the sale in the period. However, over the matching principle, it has to record bad debts expense as well in the income statement because it is not aware about whether it would be able to recover all its credit amount from the customers.
Example
In order to better understand the matching principle, consider the following examples:
- Income taxes are calculates over the profits of the company using deferred tax calculation. This is done to match the tax of the company with profits. IAS 12 and US ASB 109 discuses this matter in great detail. This tax figure calculated using the temporary differences is adjusted once the annual return of the company is approved from the tax authorities.
- Z Plc is engaged in manufacturing shoes for East Asian countries. He produced 12,000 units in accounting year 2015. At the end of the accounting period, 2,000 units were still in stock and Z Plc was not able to sell them out. According to matching principle, only sale of 10,000 units will be recorded and corresponding cost of sales will be deducted from the sale figure to calculate gross profit figure. Hence sales are matched with cost of sales of 10,000 units.
- Xara Plc is engaged in providing call center services to various big multinational companies in European countries. Recently, it has expanded its operations to Asian countries to increase its sales revenue. It employs around 5,000 employees which provide call center phone support to the customers of the multinational companies. Xara Plc bills every client in the period in which related service is rendered. This revenue is matched with the payroll cost of the staff which Xara Plc employs.