Introduction to Matching Principle
When it comes to the interpretation of financial statements, there are 14 principles in accounts that govern them. All the statements must be prepared and calculated in such a way that they respect all of them. The matching concept is just one of those principles. To abide by the matching principle, accounting requires accuracy and perfection in the documentation of revenues and expenses. Although there exists no certain matching concept definition, this text will try to articulate a meticulous definition along with the real-time use of the matching principle. By the end, you will be able to grasp period cost and products cost associated with the matching concept.
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What is the Matching Concept?
The matching concept in accounting as a principle applies to accrual accounting. Accrual accounting is the process of matching revenues, i.e., the income generated through the retail of a commodity, and the expenses, i.e. the cost of production. It simply implies that revenue and production costs must be calculated during the same accounting period. Thus, the matching principle accounting says that the income statement of the organization will be reflective of the associated cost of the revenues and the income of that period.
What is the Matching Concept in Accounting?
To further explain the matching concept, let us define period costs and product costs.
Period Costs: These are the costs that are not directly linked to the product, such as commissions, office supplies, or rent. They are only mentioned in the statement when they occur. Here, expenses must be documented in the timeframe of their incurrence rather than when you pay the amount according to the matching concept in accounting.
Product Costs: Product costs are related to the expenses made for the production of the cost. The accrual or matching principle tells us to calculate the cost associated with the production of the commodity simultaneously with the revenue associated with the sold commodities. Thus, if a salesperson can sell 200 copies of a book in January, then the cost price of those 200 copies must be matched with the income for January to calculate the profit or loss.
Matching Concept in Accounting Example
Let's suppose a company produces a hundred books for the cost of four thousand. Later, it sells twenty copies for fifty rupees per unit, thereby getting revenue of two thousand rupees. The Matching principle dictates that although the total cost of production was four thousand, the profit would be twelve hundred rupees despite the revenue being 2000. In other words, in matching principle accounting, the revenue must be considered first for the given period, and then one must see the expenses incurred to produce that revenue. Thus, here it would be wrong to imply that a loss of two thousand rupees was incurred since the company invested four thousand rupees in the production of all commodities.
The matching concept in accounting comes under the purview of accrual accounting. Often students get confused between the two concepts of accounting. Additionally, the matching concept accounting can have a duality. While the matching principle accounting accurately represents the finances of the organisation, it often misses the effects of inflation. Thus, one must be considerate of the factors to avoid errors.
Solved Matching Concept Example
Q. YESTER, an insurance company, tends to receive an insurance premium from its customers. The profit before tax for the year ended 2012 is rupees 1,00,00,000. The projected taxable profit amounts to rupees 11,00,000 against a current tax provision of 40% in the financial statements. The difference of rupees 1,00,000 between accounting profit and taxable profit is a result of taxable prepaid income. How much income tax expense should YESTER recognise to abide by the Matching Principle?
Ans: Difference between current tax and deferred tax. 4,40,000- 40,000= 4,00,000.
＄4,000 of the estimated current tax charge relates to prepaid income, recognised in the subsequent accounting period. Consequently, ＄4,000 must be subtracted from the tax expense calculation and matched against the accounting profit earned in the next year. Therefore, the tax expense for the year of ＄40,000 may also be derived by applying the tax rate of 40% to the profit before tax of ＄100,000.
FAQs on Matching Concept
1. Explain matching concepts in accounting by using an appropriate matching concept example.
Let us assume that ABC Company produced 5000 pencils in total. The cost of production in total was 500 rupees. Then, in a month, the company sold a total of 10 pencils for 10 rupees. The principle of matching concepts in accounting would imply that one must calculate the expense of 10 pencils against the revenue of 10 pencils, i.e., the sales of the particular item in the same period, to calculate the profits. It would simply be wrong to consider that a loss of 490 rupees occurred when the company made a profit of 9 rupees. This allows the company to have a more accurate status of its finances. This perfectly depicts the matching concept example.
2. What is a matching concept in accounting beneficial in, and which principle appeals more to you, accrual or matching concept?
The matching concept is applied to accrual accounting. It comes under accrual accounting. Accrual accounting is a process of matching revenues and expenditures in the same time frame. Thus, one cannot choose the matching principle over accrual accounting. Both of them complement and complete each other.
The advantages of abiding by the matching principle accounting are:-
Equality in The Distribution of Resources: The principles allow an equal distribution of company assets given the demand of balancing the costs and revenues in the same timeframe. Hence, depreciation can be easily prevented.
Accurate Reporting: The accuracy in accounting for the expenditure and the income is ensured through the principle.
The Clarity of The Company’s Finances: The investors and stakeholders get the clearest insight into the company’s profits and losses as a result of operating under the principle of matching.
The matching concept can have numerous disadvantages, such as the usage of estimation cannot be allowed. However, the principal's advantages outweigh these shortcomings, which can be compensated for with a little bit of common sense.