The matching principle, which requires revenues and costs to be recognised in the period in which they really occur rather than in the period in which the cash is received or paid, is a key idea in accrual basis accounting. In order for the financial statements to appropriately reflect the company’s financial success for that time period, this concept calls for matching income and spending within the same period.
The accrual principle is another name for the matching concept. This is due to the fact that it is founded on the accrual foundation of accounting, which records earnings and costs regardless of when money is actually received or paid.
The matching principle is a cornerstone of accrual basis accounting and is essential for producing accurate financial statements. However, it can also be a challenging concept to apply in practice. This is because businesses often incur expenses before they receive the corresponding revenue. For example, a company may incur advertising expenses in January in order to generate sales in February. Under the accrual basis of accounting, company would recognize advertising expense in January and the corresponding revenue in February.
Applying the matching principle can also be challenging when businesses incur expenses that will not be matched with revenue until some future period. For example, a company may incur research and development expenses in one year in order to develop a new product that will not be released until the following years. In this scenario, company would recognize R&D expense in year it was incurred, even though the corresponding revenue will not be recognized until the following year.