Matching Concept

This concept emphasizes that the whole of the revenue earned by an enterprise is not income. To earn the revenue, resources are consumed and the cost of the resources consumed should be setoff to obtain income. This concept states that the expenses are to be recognized in the period of their related revenue. This requires that the expenses must relate to the goods and services sold during that period to arrive at the net profits of the enterprise. Hence, matching concept requires the recognition of revenue and expenses on a comparable basis.

In order to determine the profits and losses accrued during an accounting period, the expenses must relate to the goods or services sold during the period. For example, as the fixed assets are used to generate income, the cost of these assets (in the form of depreciation) is allocated over the effective life of the asset. Likewise, the credit sales of a period may result in bad debts in subsequent period. The matching concept implies the matching of such bad debts against the credit sale revenue of that period. Generally, the advertisement expenditure incurred by an enterprise is heavy and the benefit of the expenditure lasts for more than a year. In such a case, it is inappropriate to charge whole of the expenditure in one period. A part of the expenditure is carried forward and written off over subsequent periods, against the revenue of the subsequent periods.

The cash system of accounting does not adhere to this principle of matching and hence the Companies Act, 1956 does not recognize cash system of accounting. The Companies Act, 1956 requires the pursuance of accrual system of accounting (the method shall be discussed in detail in our next section) for the purpose of adhering to the matching concept.