Matching principle is the accounting principle that expenses must be recognized when the associated revenue is recognized. The aim is to present accurately net income for the accounting period and avoid revenue misstatements during the period.
For example, wages and construction materials purchased to build rental properties are depreciated during the building period to generate rent revenue, not during the construction period. In this case, the company recognizes revenue when it rents out the property so that expenses related to property need to be depreciated at the same time.
Another example, a company bought a new machine for Rp100 in 2019. The company estimates the economic benefit of the machine is 5 years. Therefore, the machine will produce products (revenue) for the next 5 years. Under the matching principle, the company recognizes the depreciation expense of the machine for 5 years, that is, as long as it produces the product, rather than being fully charged in 2019.
If goods purchased in the current year remain unsold at the end of the year, their costs are excluded from the cost of goods sold when reporting a profit for the year. Instead, the costs of these items will be deducted from the revenue of the next period after they are sold.
Why the matching principle is important
Through expense and revenue matching, financial statements can represent more accurate operating results. This principle helps avoid distortions in financial position and improve the quality of financial statements.
The concept of matching is slightly different from the accrual concept. The accrual principle states that companies recognize revenues and expenses when they occur. The concept of accrual falls in the same period. Still, the concept of matching can fall between two different periods.
Some examples of transactions that affect more than one period are:
- Prepaid insurance premium
- Salary expenses
- Inventories
- Purchase of fixed assets
- Prepaid rent for the years to come