The matching principle is an accounting principle which states that expenses should be recognized in the same reporting period as the related revenues
The matching principle combines accrual accounting (wherein revenues and expenses are recorded as they are incurred, no matter when cash is received) with the revenue recognition principle (which states that revenues should be recognized when they are earned, no matter when cash is received).
The matching principle is not used in cash accounting, wherein revenues and expenses are only recorded when cash changes hands.
The matching principle a basic accounting principle that is adhered to in order to ensure consistency in a company's financial statements : i.e. the income statement, balance sheet, etc.
If expenses are recognized at the wrong time, the financial statements may be greatly distorted: in turn jeopardizing the quality of the statements and providing an inaccurate representation of the financial position of the business.
For example :
- If you recognize an expense earlier than is appropriate, this results in a lower net income.
- If you recognize an expense later than is appropriate, this results in a higher net income
Benefits of the matching principle :
Certain business financial elements benefit from the use of the matching principle. Assets(specifically longterm assets) experience depreciation and the use of the matching principle ensures that matching is spread out appropriately to balance out the incoming cash flow.
The matching principle allows an asset to be distributed and matched over the course of its useful life in order to balance the cost over a given period.
