The concept of “principle” is an integral part of any science. At the same time, in contrast to the natural sciences, where the principles are consistent, since they are determined by fundamental truths, the situation is somewhat different within the framework of accounting. Accounting is the result of human intellectual activity, where the principles are subjective. However, the importance of these principles cannot be underestimated.
How successful an organization depends largely on the accuracy of accounting, for which it is necessary to strictly adhere to all generally accepted accounting principles. The importance of accounting principles was first discussed in the first quarter of the 20th century. At that time, American professor William Paton formulated six principles of accounting, which were the first attempts to unify the conceptual foundations of accounting.
The matching principle is an international accounting principle, which tells that all income receipts should be attributed to the period of the sale, delivery of goods, and the provision of services and that expenses are recorded in the particular reporting period only if they led to the income of this period. Let’s take a little closer look at this important accounting concept.
What Is Matching Principle?
The matching principle provides accounting guidance that all expenses must be recorded in the Income statement for the period in which the income attributable to those expenses was received. This means that expenses that are credited to the debit side of the accounts must have a corresponding credit entry (as required by the double-entry accounting system) for the same period, regardless of when the actual transaction took place.
This principle works as follows: if the costs incurred or resources used to lead to future benefits, they are recorded as assets; if they lead to current benefits, then as expenses; if they do not lead to any benefits – as losses. This principle is closely intertwined with the accrual concept.
Lion Coffee Shop has $800 worth of coffee ingredients as of July 1st. During the month of July, it purchased more ingredients and paid $1,270. At the end of July, it still had $450 worth of ingredients. Accordingly, Lion Coffee Shop’s expenses in July were $1,620 ($800 + $1,270 – $450). In other words, it is accounting only for the goods it used during this particular month.
Ingredients that Lion Coffee Shop had at the beginning of July were considered assets until they were used up and moved to the appropriate expense accounts. The leftover ingredients, although purchased during the month of July, are also not considered an expense because the company still has these items and they did not contribute to the earning of the revenue in the month of July.
Lion shop also paid for the next 6 months of rent. The total payment was $9,000. At the end of July, it used only one month of the rent it paid upfront. Thus, the remaining $7,500 is considered an asset (prepaid rent) and not an expense according to the matching principle.