The matching principle states clearly that income and expenses should be matched in the statement of profit or loss in the periods in which they relates.
To understand this concept let’s explain further. If a statement of profit or loss is for the year ended 31st March 2016, the income and expenses to be posted to the statement of profit or loss are those income and expenses that relates to the year ended 31st March, 2016.
WHEN CAN MARCHING CONCEPT BE APPLIED
Matching concept must be applied when preparing financial statement. Let me explain an example of applying the matching concept.
When goods are sold on credit, the entity expect income in the nearest future. However, for Prudence’s seek, a provision for bad and doubtful debts is recorded in the books of account, in event of bad debt.
Matching concept requires that the revenue from sales of goods on credit most be posted in the statement of profit or loss for the year under consideration and not in the year the revenue will be received.
This revenue will also be matched with the provision for bad debt which is an expenses in the statement of profit or loss.
Matching concept can be applied in two ways. It can be directly or indirectly.
The aforementioned example is an indirect application. This is so, as the provision for bad debt is not deducted directly from revenue figure in the statement of profit or loss. An example of direct application is the matching of revenue to cost of sales.
RELATIONSHIP WITH OTHER CONCEPT
Matching concept relates more with time. An income to be matched with an expenses must fall within the same time period. Therefore, matching concept has a positive relationship with periodicity concept.
Matching concept also separate Peter from Paul. In what sense, the concept helps differentiates clearly the accrual basis and the cash basis. Only income earned and incurred for the periods under consideration whether paid or not are matched. Others are deferred to the next period.
IMPORTANCE OF MATCHING CONCEPT
1. Matching concept avoid overstatement and understatement of profit after tax.
2. It is a requirement in the preparation and presentation of financial statement.
4. It affects the way final year adjustments are calculated and posted to the financial statement.