- The process of ascertaining the amount of profit earned or the loss incurred during a particular period involves deduction of related expenses from the revenue earned during that period.
- The matching concept emphasises exactly on this aspect.
- It states that expenses incurred in an accounting period should be matched with revenues during that period.
- It follows from this that the revenue and expenses incurred to earn these revenues must belong to the same accounting period.
- As already stated, revenue is recognised when a sale is complete or service is rendered rather when cash is received.
- Similarly, an expense is recognised not when cash is paid but when an asset or service has been used to generate revenue.
- For example, expenses such as salaries, rent, insurance are recognised on the basis of period to which they relate and not when these are paid. Similarly, costs like depreciation of fixed asset is divided over the periods during which the asset is used. Let us also understand how cost of goods are matched with their sales revenue. While ascertaining the profit or loss of an accounting year, we should not take the cost of all the goods produced or purchased during that period but consider only the cost of goods that have been sold during that year. For this purpose, the cost of unsold goods should be deducted from the cost of the goods produced or purchased.
- The matching concept, thus, implies that all revenues earned during an accounting year, whether received during that year, or not and all costs incurred, whether paid during the year, or not should be taken into account while ascertaining profit or loss for that year.
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