Matching principle

Definition

The matching principle is an accounting concept that dictates expenses should be recorded in the same period as the revenues they help generate. This ensures financial statements reflect accurate profitability during a specific period.

5 Must Know Facts For Your Next Test

1. The matching principle aligns with accrual accounting, not cash basis accounting.
2. It requires companies to record expenses when they are incurred, not necessarily when payment is made.
3. Revenue and related expenses should be matched to provide a clear picture of profitability for a given period.
4. Depreciation and amortization are common examples of the matching principle in practice.
5. Failing to apply the matching principle can result in misstated financial performance.

Review Questions

• How does the matching principle ensure accurate profitability reporting?
• Why is the matching principle important for financial statements?
• Give an example of how depreciation follows the matching principle.

Related terms

Accrual Accounting:

An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when cash is exchanged.

Revenue Recognition Principle:

An accounting guideline stating that revenue should be recognized in the accounting period in which it is earned.

Depreciation:

The systematic allocation of the cost of a tangible asset over its useful life.