Matching principle

This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. Find sources: "Matching principle" – news · newspapers · books · scholar · JSTOR (February 2013) (Learn how and when to remove this message)

Part of a series on
Accounting
Constant purchasing power Historical cost Management Tax
Major types Audit Budget Cost Forensic Financial Fund Governmental Management Social Tax
Key concepts Accounting period Accrual Constant purchasing power Economic entity Fair value Going concern Historical cost Matching principle Materiality Revenue recognition Unit of account
Selected accounts Assets Cash Cost of goods sold Depreciation / Amortization (business) Equity Expenses Goodwill Liabilities Profit Revenue
Accounting standards Generally-accepted principles Generally-accepted auditing standards Convergence International Financial Reporting Standards International Standards on Auditing Management Accounting Principles
Financial statements Annual report Balance sheet Cash-flow Equity Income Management discussion Financial statement analysis
Bookkeeping Bank reconciliation Debits and credits Double-entry system FIFO and LIFO Journal Ledger / General ledger Trial balance
Auditing Financial Internal Firms Report Sarbanes–Oxley Act
People and organizations Accountants Accounting organizations Luca Pacioli
Development History Research Positive accounting Sarbanes–Oxley Act
Misconduct Creative Earnings management Error account Hollywood Off-balance-sheet Two sets of books
v t e

In accrual basis accounting, the matching principle (or expense recognition principle)^[1] dictates that an expense should be reported in the same period as the corresponding revenue is earned. The revenue recognition principle states that revenues should be recorded in the period in which they are earned, regardless of when the cash is transferred. By recognising costs in the period they are incurred, a business can determine how much was spent to generate revenue, thereby reducing discrepancies between when costs are incurred and when revenue is realised. In contrast, cash basis accounting requires recognising an expense when the cash is paid, irrespective of when the expense was incurred.^[2]

If no cause-and-effect relationship exists (e.g., a sale is impossible), costs are recognised as expenses in the accounting period in which they expired, i.e., when the product or service has been used up or consumed (e.g., spoiled, dated, or substandard goods, or services no longer needed). Prepaid expenses are not recognised as expenses but as assets until one of the qualifying conditions is met, which then results in their recognition as expenses. If no connection with revenues can be established, costs are recognised immediately as expenses (e.g., general administrative and research and development costs).

Prepaid expenses, such as employee wages or subcontractor fees paid out or promised, are not recognised as expenses. They are considered assets because they provide probable future benefits. As a prepaid expense is used, an adjusting entry is made to update the value of the asset. For example, with prepaid rent, the cost for the period would be deducted from the Prepaid Rent account.^[3]

• Accrual
• Comparison of cash and accrual methods of accounting
• Deferrals in accrual accounting
• FIFO and LIFO accounting, different ways of matching stock to sales
• Revenue recognition