What Is the Matching Principle?
Why expenses are recorded in the same period as the revenue they help earn.
Home › Accounting Glossary › Matching Principle
| Basis | Accrual accounting |
|---|---|
| Applied through | Accruals, prepayments, depreciation, cost of goods sold |
| Topic | Financial accounting · Principles |
The matching principle in plain English
To show a fair profit for a period, the costs of earning that period’s revenue must be put in the same period, even if the cash moves earlier or later. Otherwise profit would jump up and down depending on when bills were paid.
Worked example
A business pays 500 of sales commission in January on sales made in December. The commission helped earn December’s revenue, so it is recorded as a December expense, with an accrued liability of 500 at 31 December.
| 31 December | Debit | Credit |
|---|---|---|
| Commission expense | 500 | |
| Accrued expenses | 500 |
The same idea applies to cost of goods sold, which is recorded only when the related goods are sold, and to depreciation, which spreads an asset’s cost over the years it helps earn revenue.
- Recording expenses only when paid. That breaks the matching principle.
- Charging a whole year’s insurance paid in advance to one month, instead of spreading it.
Frequently asked questions
What is the purpose of the matching principle?
To give a true picture of profit for each period by pairing revenue with the costs that produced it.
How does matching relate to accrual accounting?
Accrual accounting records revenue when earned and expenses when incurred. Matching is the guide for deciding which period an expense belongs to.
Is depreciation an example of matching?
Yes. It spreads an asset’s cost over the periods in which the asset helps earn revenue.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.