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Let's Throw Some Light on What's Matching Principle in Accounting

Matching Principle
The concept of matching principle in accounting helps in linking revenue earned to the associated costs incurred. Read the following article to understand this concept in detail.
WealthHow Staff
Last Updated: May 31, 2018
One of the foundations of accrual basis of accounting is the matching principle. It plays an important role in helping accountants to make consistently clear income statements.

Importance in Accounting

It is a concept, where all the revenues are matched with the expenses generated to earn these revenues during the accounting period. Under this concept, when one records revenue, he/she should simultaneously record the direct expenses related to the revenue, as well. Therefore, if one becomes aware of a cause and effect relationship between revenue and expenses, it will be recorded during the same accounting period. Accountants also use this method, while posting journal entries, and each entry should contain a debit and a credit record.

This principle is preferred by many businesses, as it conforms to the US Generally Accepted Accounting Principles (GAAP). It posts the income and expenses, as they occur. The postings are not deferred to a later date, and therefore, accrual accounting is popular among accountants.

It helps companies to minimize the accounting entry-timing disparities. It also helps in recognizing the revenue earned and the related expenses, as and when they occur. This helps in preparation of a more accurate financial record analysis during a particular accounting period, from the general ledger. The accounting equation of assets, which is based on the matching principle is as follows:

Assets = Liabilities + Owner's Equity

The income statement account in the general ledger is also written according to this concept. These statements include sales, sales discounts, cost of goods sold, and selling and administrative expenses. Thus, every journal entry includes a debit and credit to balance the prior postings carried out in the general ledger.

The cause and effect relationship in terms of financial transactions is also covered under this principle. Every dollar spent by the company should be accompanied by an offset. This means the company should be able to show that the revenue earned was spent on either wages, items purchased, etc. In case of sales, the entries should be matched with the cost of inventory that is sold, purchase of materials for sale, etc. The self-balancing tool of accrual accounting helps to maintain the general ledger up-to-date, with accuracy.

Example

One can explain the matching principle with the help of many examples related to accounting principles and concepts. The following example will explain this concept more clearly.

Wages
If the pay period of hourly employees ends on June 28, the employees will continue to earn their wages till June 30. These wages will be paid to the employees on July 5. Thus, the account will record the wages earned from June 29 to June 30 as an expense.

Bonus
An employee may earn USD 40,000 as a bonus under a company plan. This bonus is based on the measurable performance of each individual employee during the year. It will be paid to the employee in the following year. The expense of bonus by the company is recorded within the year, when the employee actually earned it.

Commission
A salesman is paid 5% commission for every sale made and recorded in the month of September. He will be paid a commission of USD 5,000 in October. Thus, according to it, the commission will be recorded as an expense made in September.

The matching principle is clearly explained in the aforementioned example. One needs to follow the accounting guidelines laid down for companies by the Financial Accounting Standard Board (FASB) in the US. It helps the companies to record and keep their general ledger up-to-date, during the accounting period.