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In other words, the earnings or revenues and the expenses shown in an income statement must both refer to the same goods transferred or services rendered to customers during the accounting period. Since all transfers of goods are considered to be sales for the period during which such transfers take place, we have to carefully trace the expenses for producing the goods actually sold, if we are to determine the profit earned out of such sales. The realization and accrual concepts are essentially derived from the need to match expenses with revenues earned during an accounting period. This comparison will give the net profit or loss for that particular accounting period. The requirement for this concept is the allocation of cost to different accounting periods so that only relevant incomes and expenses are matched.

Most businesses record their revenues and expenses on an annual basis, which happens regardless of the time of receipts of payments. Matching Principle: ExplanationĪccording to the matching principle of accounting, the incomes or revenues of a particular period must be matched with the expenses of that particular period. The second fact is that all costs that have been incurred for the purpose of earning the revenue should be included in the expenses for the period in which the credit for the income is taken. This means that all resources needed to earn this revenue have been used, all steps needed to earn this revenue have been taken, and there is no apparent reason for this revenue not being received by the business. If we include any revenue in a particular period, we should be sure of two key facts.įirst, that the revenue has been earned in the period in which it is included in the income statement. Since performance must be measured in terms of a period, it is important to ensure that revenues and costs that are included in the income statement of a particular period do really belong to that period and correspond to each other. The matching principle of accounting is a natural extension of the accounting period principle.