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The matching concept asserts that revenue and the expenses incurred to earn that revenue must be recorded in the same accounting period. Once the revenue is recognised, it must be assigned to the appropriate accounting period, which is facilitated by the accrual concept.
By applying the matching concept, we ensure that all revenues earned during an accounting year, whether received within that year or not and all costs incurred whether paid within the year or not are considered when determining the profit or loss for that year.
This concept is grounded in the accounting period concept. To determine the profits made by a business during a specific period, the accountant must match the revenues of that period with the corresponding costs.
"Matching" involves the appropriate association of related revenues and expenses within a particular accounting period.
In other words, profits for a given accounting period can only be determined when the revenues earned during that period are compared with the expenses incurred to earn those revenues.
For example, If the rent for March 2024 is paid in April 2024, the rent should be recorded as an expense for the year 2023-24. Revenues for that year should be matched with the costs incurred to earn those revenues, including the rent for March 24, even though it was paid in April 2024.
This concept requires adjustments for outstanding expenses, accrued incomes, prepaid expenses, etc. Expenses related to recorded revenue are recognised in the same year, regardless of when they are paid.
The significance of the Matching Concept includes:
It provides a framework for aligning expenses with revenue to accurately determine the profit or loss for a specific period.
It enables investors and shareholders to gain a clear understanding of the exact profit or loss of the business.
We have thoroughly explored the accounting concept, and in our next article, we will delve into the topic of accounting conventions, starting with the convention of consistency.