The matching principle is an accounting concept that matches revenues with the expenses that were incurred in order to generate those revenues in the first place. It is a sort of “check” for accountants to be sure that the books they are balancing or the accounts they are managing are accurate. Most of the time this principle is applied to specific accounting periods, particularly quarters or years. It is fairly basic, at least from a technical standpoint, but it forms the basis for many other more complex rules and practices. The accrual accounting method, for example, is based on this principle since it records financial transactions as they occur, rather than when cash changes hands. Accountants also use it when posting journal entries, as each entry must contain a debit and a credit.
How It’s Used
In most cases there are only two things accountants need to know in order get started with the principle, namely revenues and expenses. It can take a bit of expertise to isolate and allocate each of these, especially in more complex corporate settings, but once they’ve been set apart getting started is relatively straightforward. The accountant or other financial professional basically matches each financial gain to the costs it took to get there. As a concept it is used in many different settings to help professionals keep track of what is going in and what is coming out, and it can help companies and businesses make sound financial decisions.
Accountants typically follow this principle for the income statement account in the general ledger, for instance. These accounts include sales, sales discounts, cost of goods sold (COGS), and selling and administrative expenses. The principle is used as accountants prepare and post journal entries; each entry must include a debit and credit that balances the entry prior to posting in the general ledger.
The traditional accounting equation of Assets = Liabilities + Owner’s Equity is also based on the matching principle. The equation requires all financial transactions to balance during each financial accounting period. This allows financial statements to be accurately prepared from the company’s general ledger. Improperly prepared financial statements can distort the company’s true financial position for both internal and external stakeholders.
Relationship With Business Transactions
The matching principle also has a cause and effect relationship with financial transactions occurring from normal business operations. Each dollar or unit of currency spent must have an offset, such as wages paid or items purchased for the business. Sales entries contain sales to customers matched with the inventory cost for the item sold; materials purchased for sale are matched with the spent cash; and wages paid are matched with the liability owed to employees. The accrual accounting method uses the principle as a self-balancing tool to maintain the accuracy of the general ledger.
This concept also makes extensive use of accruals and deferrals to balance general ledger accounts when no information has been posted to the accounts. Companies may experience a lag in posting certain expense items to their general ledger, such as utilities expenses, freight expenses, or payroll expenses. To correct a lag situation, accountants often post accrued expense amounts that represent the normal monthly expense amount. These accruals maintain the standards of the matching principle since all revenues will be matched with the expenses incurred to generate those revenues in the same period.
In most places, financial transactions including both revenues and expenses must be recorded in the general ledger according to standard accounting guidelines. These guidelines can vary from place to place, but almost every jurisdiction enforces certain uniform rules that apply to all businesses and financial actors in the market. In the United States, the Financial Accounting Standards Board writes and issues accounting guidelines for companies to follow when conducting business. Not following the rules or failing to apply the rules properly can lead to sanctions and fines. Proper matching can help accountants realize whether there’s a discrepancy before records are filed in any official way.