Matching Principle Definition - AccountingTools

What is the Matching Principle?

The matching principle requires that revenues and any related expenses be recognized together in the same reporting period. Thus, if there is a cause-and-effect relationship between revenue and certain expenses, then record them at the same time. In some cases, it will be necessary to conduct a systematic allocation of a cost across multiple reporting periods, such as when the purchase cost of a fixed asset is depreciated over several years. If there is no cause-and-effect relationship, then charge the cost to expense at once.

This is one of the most essential concepts in accrual basis accounting, since it mandates that the entire effect of a transaction be recorded within the same reporting period. Doing so ensures that the reporting of profits is not artificially accelerated or delayed in any reporting period. Instead, when revenues are reported, all associated expenses are also reported at the same time.

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Examples of the Matching Principle

Several examples of the matching principle are noted below, for commissions, depreciation, bonus payments, wages, and the cost of goods sold:

• Matching principle for commissions. A salesman earns a 5% commission on sales shipped and recorded in January. The commission of $5,000 is paid in February. You should record the commission expense in January, so that the expense is recognized in the same month as the associated sale.

• Matching principle for depreciation. A company acquires production equipment for $100,000 that has a projected useful life of 10 years. It should charge the cost of the equipment to depreciation expense at the rate of $10,000 per year for ten years, so that the expense is recognized over the entirety of its useful life.

• Matching principle for employee bonuses. Under a bonus plan, an employee earns a $50,000 bonus based on measurable aspects of her performance within a year. The bonus is paid in the following year. You should record the bonus expense within the year when the employee earned it.

• Matching principle for wages. The pay period for hourly employees ends on March 28, but employees continue to earn wages through March 31, which are paid to them on April 4. The employer should record an expense in March for those wages earned from March 29 to March 31.

• Matching principle for the cost of goods sold. A company sells 50 units of a product for $5,000. The cost of the goods sold for these units is $2,000. The company should recognize the entire $2,000 cost as expense in the same reporting period as the sale, since the recognition of revenue and the cost of goods sold are tightly linked.