Matching Principle (Matching Revenue and Expenses)

Perhaps this is easily the most crucial requirement in the operational details and working procedures in the preparation of Accounts, including Final Accounts. This is to be a purely internal watchdog guideline for any organisation without which "fair  and true" pictures of the financial status cannot emerge. Errors in the matter, procedures and operational details of its adoption can, and would, vitiate any external reporting. 

The background  is : Trading as well as P & L A/cs are prepared by grouping and clubbing all nominal accounts extracted from the trial balance. In this connection, in practice, all accounts pertaining to revenue and expenditure are nominal accounts. 

The guiding principle is : Given the background, yet, all the expenditures and revenues do not necessarily affect (or can be taken to contribute to) the profit of the enterprise for the accounting period. Of the total expenditure incurred in a year and those brought forward from previous years [Note : "years" - not merely "year"], a certain part is (eligible to be, and is) treated as an expense, and, accordingly charged against revenues of the year, i.e. debited to the P & L A/c, and the remaining amount is carried forward to the next year as an asset and is shown in the Balance Sheet. For calculating correctly the profits (the term includes "loss", if so) for the accounting period, the PRINCIPLE OF MATCHING QF REVENUE AND EXPENSES has to be applied. ("Matching does not imply exact balancing but appropriately relating and comparing.") 

In this connection, one important question is as to how much of the amount of expenditure should be so charged against the P & L A/c and how much is to be carried forward. If the amounts are not determined properly, both the statements will be wrong the profit for the year will be wrong and the BS too will be wrong. 

This is premised on : all the figures of income (on the Cr. side of P & L A/c) and of those expenses (on the Dr. side of P & L A/c) are mutually inter-related and have been adequately and appropriately matched. Such expenses which lead to revenue or sale during the accounting period have to be matched against such incomes. The operationalisation of this principle requires the following to be adhered to : 

• the distinction between capital expenditure and revenue expenditure should be clearly understood and should dictate the correct allocation of amounts between the P & L A/c and the BS. 
• the extent of cost allocated is taken as expense in the P & L A/c. 
• it would be wrong to consider sales price as revenue of such goods whose cost has not yet been accounted for. 
• it would equally be wrong to consider an expenditure as an expense if it will bring in revenue (only) in future. 
• based on the correct entries, by mutual comparison between them, the profit or loss for the period is arrived at. 

In other words, the incomes and revenues earned as shown in the P & L A/c should have relevance to the costs and expenses incurred as shown on the other side of the P & L A/c, and vice-versa; and such disclosure of revenues and expenditure refer to what can be properly treated as belonging  to the current year. This is the MATCHING PRINCIPLE.