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.
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.
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.