What is the matching principle?
The matching principle simply means matching revenues with expenses. The matching principle is the most obvious difference between cash and accrual based accounting.
In cash based accounting, revenues and expenses are recognized when cash is received or paid out. Accrual based accounting determines that revenues and expenses should be recognized at the time of the transaction regardless of cash inflows or outflows.
How is the matching principle used?
In the most cases, there are only two things accountants need to know in order to get started with the principle. These are revenues and expenses. It might take a bit of expertise to isolate and allocate each of these. This is especially true in more complex corporate settings, but once they have been set apart it should be relatively straightforward to get started. The accountant basically matches each financial gain to the costs it took to get there. As a concept, it is used in many different settings to help professionals keep track of what is going on and what is coming out. It can also help companies and businesses to make sound financial decisions.
Accountants typically follow this principle for the income statement account in the general ledger. The principle is used as they prepare and post journal entries. Each entry must include a debit and credit amount that balances the entry before it is posted in the general ledger.
The traditional accounting equation is also based on the matching principle. The equation required all financial transactions to balance during each financial accounting period. This allows the financial statements to be accurately prepared from the general ledger. Improperly prepared financial statements can distort the company’s true financial position. This is true for both internal and external stakeholders.
The relationship between the matching principle and business transactions.
The matching principle has a cause and effect relationship with financial transactions occurring from normal business operations. Each unit of currency spent must have an offset. The accrual accounting method uses the principle as a self-balancing tool to maintain the accuracy of the general ledger.