Key Principles and Application of the Matching Concept in Accounting
The Matching Concept also referred to as the Periodic Matching of Costs and Revenues, aligns with the accounting period concept. It revolves around associating the revenues of a specific period with the corresponding costs to determine the profits made by a business during that timeframe.
Matching involves appropriately linking related revenues and expenses within a particular accounting period. In simpler terms, the profits of a business in a given accounting period can only be accurately determined when the revenues earned during that period are matched with the expenses incurred to generate them.
To elaborate, the concept dictates that revenue expenses incurred to generate income should be deducted in the same accounting period, irrespective of whether they have been paid or not. This means that expenses connected to recorded revenue should be recognised in the books in the same year.
For instance, in a business using the calendar year as its accounting year, if rent for March 2023 is paid in April 2023, the rent should be considered as an expenditure for the year 2023. The revenues of that year should be matched with the costs incurred for earning that revenue, including the rent for March 2023, even though it was paid in April 2023.
This concept necessitates adjustments for outstanding expenses, accrued incomes, prepaid expenses, and the like.
The essence of the matching concept is that both the revenue and the expenses incurred to earn that revenue must pertain to the same accounting period. After realising revenue, the next step is to allocate it to the relevant accounting period, a process facilitated by the accrual concept.
The transactions are recorded under the headings of Expenses and Revenue and the comparison between them as results in either profit or loss. If revenue exceeds expenses, it is considered a profit; if expenses surpass revenue, it is termed a loss.
The application of the matching concept ensures this accurate determination. Consequently, the matching concept implies that all revenues earned during an accounting year, whether received or not, and all costs incurred, whether paid or not, should be considered when ascertaining the profit or loss for that year.
Significance of the Matching Concept:
Its guidance on how expenses should be matched with revenue to determine the exact profit or loss for a specific period.
It is particularly valuable for investors and shareholders seeking to understand the precise financial performance of the business.
In summary, The Matching Concept in accounting ensures that revenues and related expenses are matched within the same accounting period to accurately determine a business's profit or loss. This means recognizing expenses incurred to generate income, whether paid or not, in the same period as the corresponding revenue. The concept guides the accurate assessment of the financial performance of the business.