What it means
The matching principle is all about timing. It is an approach in accounting where you match the costs of doing business with the revenues they produce.
If you sell a product or service, you record the costs directly related to making that sale in the same accounting period. The goal is to provide a more accurate picture of a company's financial health.
When costs and the revenue they helped earn sit in the same period, the profit figure shows the true profitability of the operations in that period. Without it, a business could look hugely profitable one month and badly loss-making the next, simply because of when bills were paid.
The principle is a cornerstone of accrual accounting, where revenue and expenses are recorded when they are earned or incurred, not when cash moves. Cash-basis accounting, by contrast, records items only when money is received or paid, and so does not follow the matching principle.
This is why a company can pay a supplier in February and still record the expense in March, once the related goods are sold. Some costs cannot be linked to a particular sale, such as the monthly rent or office salaries.
These are usually recorded in the period they are used, while costs that benefit several periods, such as machinery, are spread over time through depreciation. Non-finance managers should remember that matching affects reported profit, but does not change the cash a business actually holds.
Think of the matching principle like matching socks from a laundry basket. Just as you pair each sock with its match to complete a pair, you pair costs and revenues in the same financial period to complete the financial picture.
In practice
Real-world examples
Example 1
A small bakery sells a wedding cake for $500 in December. It records the $120 of ingredients, the $80 of baker wages and the $20 of packaging used for that cake in December too, giving a profit of $280 on the sale, even if the flour was bought in November.
Example 2
A furniture manufacturer buys $20,000 of timber in February and sells the chairs made from it in March for $35,000. It holds the timber as inventory in February and records the $20,000 as an expense in March, when the sales revenue is recorded, giving a $15,000 gross profit in March.
Example 3
A software company pays a salesperson a $3,000 commission for signing a customer in June. The customer's subscription revenue is earned across the following twelve months, so a business following the matching principle may spread the commission across that year, recording $250 a month, in line with the revenue.
Think of it
Think of the matching principle like matching socks from a laundry basket. Just as you pair each sock with its match to complete a pair, you pair costs and revenues in the same financial period to complete the financial picture.
Case study
Seen in the real world
This is a fictional, illustrative scenario. Harbour Light Printing, an invented print shop, bought $24,000 of paper in October for a large calendar order that it delivered and invoiced in December for $60,000. The owner first recorded the paper cost in October, which made October look like a $24,000 loss and December look unusually profitable. On the advice of an accountant, Harbour Light held the paper as inventory until the calendars were delivered and then recorded the $24,000 as an expense in December alongside the $60,000 of revenue.
Together with $16,000 of December labour and printing costs, December showed a profit of $60,000 - $24,000 - $16,000 = $20,000, and October showed no distorting loss. The owner could now see that calendars earned a healthy margin of $20,000 on $60,000 of sales, which is 33%, and that the swings in monthly profit had been caused by when costs were paid and not by how the business was doing. When she applied for a small bank loan the following spring, the bank was able to rely on monthly figures that reflected real trading. This illustrative example shows why lenders and investors prefer accounts built on matching.
Watch out
Common mistakes
- Recording an expense when the bill is paid instead of when the related revenue is earned, which distorts monthly profit.
- Believing that matching means cash in and cash out must also match, when it only governs when income and costs are reported.
- Ignoring costs that benefit several periods, such as equipment, and charging all of them to the month of purchase.
Questions
People also ask
Does the matching principle apply to cash-basis accounting?
No. It belongs to accrual accounting, where revenue and costs are recorded when earned or incurred rather than when cash changes hands.
How does depreciation relate to the matching principle?
Depreciation spreads the cost of a long-lasting asset over the years it helps earn revenue, so each year's profit carries a fair share of the cost.
What if a cost cannot be tied to any particular revenue?
It is usually recorded as an expense in the period it is used or incurred, such as monthly rent or administrative salaries.