Definition
The matching principle is a financial accounting term that refers to a standard, which states that revenues generated in an accounting period need to be matched with the expenses incurred in that same accounting period.
Explanation
When assembling a company's income statement, the matching principle refers to the relationship that exists between the expenses incurred by a business and the revenues realized as a result of those costs.
Timing is a very important factor when matching revenues to expenses, since expenses are typically required to generate revenues. By matching expenses with revenues in the same accounting period, analysts and investors have a clearer picture of the company's operating efficiency.
The matching principle is aligned with cost accounting systems, while it's at odds with cash accounting.
Example
The three most commonly used categories of costs that support the matching principle include:
Depreciation: a method of allocating the cost of a fixed asset to those time periods that benefit from the use of the asset.
Accrued Expenses: the recording of an expense incurred but not yet paid for in cash.
Deferred Expenses: also known as a prepaid expense, this is the recording of an expense paid for in cash, but the full benefit of that expense is not yet realized.
Related Terms
The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.
Moneyzine EditorJanuary 22nd, 2024
The financial accounting term depreciation is sometimes defined as a decline in tangible plant's service potential. Depreciation is a method of allocating the cost of a tangible asset in a systematic manner to those time periods that benefit from the use of the asset.Moneyzine EditorJanuary 16th, 2024
The accrual basis accounting method calls for the recording of economic business events as services are provided or consumed; not when cash is received or paid. Therefore, the accrual method of accounting requires the reporting of revenues as they are earned and expenses as they are incurred.Moneyzine EditorJanuary 3rd, 2024
The cash basis accounting method calls for the recording of economic business events as cash is received or paid. Therefore, the cash method of accounting requires the reporting of revenues when cash is received from customers and payments are made for expenses.Moneyzine EditorJanuary 10th, 2024- The financial accounting term prepaid expense refers to the portion of an advance payment that has not been used up at the end of an accounting period. Prepaid expenses are an asset and appear on a company's balance sheet.Moneyzine EditorSeptember 21st, 2023
- The financial accounting term Revenue Recognition Principle refers to a standard condition under which revenues are recorded in a company's financial statements. According to the Revenue Recognition Principle, revenue is recorded when it is realized or realizable and earned.Moneyzine EditorSeptember 21st, 2023
The financial accounting term Historical Cost Principle refers to a valuation technique used in the preparation of financial statements. The Historical Cost Principle states the value of an asset or liability is recorded on the balance sheet at its cost at the time of acquisition.Moneyzine EditorJanuary 19th, 2024
The financial accounting term Full Disclosure Principle refers to the practice of providing information of sufficient importance such that it would influence the decision making process of an individual reading a financial statement.Moneyzine EditorJanuary 18th, 2024
