Matching Principle

One of the foundation of accrual basis of accounting is matching principle. It plays an important role in helping accountants make consistently clear income statements. This basic accounting concept and principle, will be explained in detail in the following paragraphs.

What is Matching Principle in Accounting

Matching principle in accounting is a concept, where all the revenues are matched with the expenses generated to earn these revenues during an accounting period. Under this concept, when one records revenue, they should simultaneously record the direct expenses related to the revenue. Therefore, if one sees a cause and effect relationship between revenue and expenses, it will be recorded during the same accounting period. Accountants also use the matching principle while posting journal entries. This means each entry should contain a debit and a credit record.

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

The GAAP matching principle helps companies 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 is based on the matching principle in accounting. The assets equation is as follows:

Assets = Liabilities + Owner's Equity

The income statement account, in the general ledger, is also written according to the matching principle concept. These account statements include sales, sales discounts, cost of goods sold, 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 are also covered under the matching principle. Every dollar spent by the company should be accompanied by an offset. This means the company should be able to show 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 basis of accounting helps maintains the general ledger up-to-date and accurately.

Matching Principle Example

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

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

Bonus
An employee may earn $40,000 as a bonus under a company plan. This bonus is based on the measurable performance of each individual employee during a year. The bonus will be paid to the employee 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 sales made, and recorded in the month of September. The salesman will be paid a commission of $5,000 in October. Thus, according to matching principle, the commission will be recorded as an expense made in September.

This was some information related to matching principle in accounting. The concept is clearly explained in the matching principle example covered above. One needs to follow the accounting guidelines laid down for companies by the Financial Accounting Standard Board (FASB) in United States. GAAP matching principle helps companies record and keep their general ledger up-to-date during an accounting period. Hope, the above explanations on matching principles and accounting terms has helped you understand this accounting concept.