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What is the matching principle?

The matching principle is one of the basic underlying guidelines in accounting. The matching principle directs a company to report an expense on its income statement in the same period as the related revenues.

To illustrate the matching principle, let's assume that all of a company's sales are made through sales representatives (reps) who earn a 10% commission. The commissions for each calendar month's sales are paid to the reps on the 15th day of the following month. For example, if the company has $60,000 of sales in December, the company will pay commissions of $6,000 on January 15. The matching principle requires that $6,000 of commission expense be reported on the December income statement along with the related December sales of $60,000. This is likely to be carried out through an adjusting entry on December 31 that debits Commission Expense and credits Commissions Payable for $6,000.

The matching principle is associated with the accrual method of accounting and adjusting entries. Without the matching principle, the company might report the $6,000 of commission expense in January (when it is paid) instead of December (when the expense and the liability are incurred).

A retailer's or a manufacturer's cost of goods sold is another example of an expense that is matched with sales through a cause and effect relationship. However, not all costs and expenses have a cause and effect relationship with sales or revenues. Hence, the matching principle may require a systematic allocation of a cost to the accounting periods in which the cost is used up. For example, if a company purchases an elaborate office system for $252,000 that will be useful for 84 months, the company will match $3,000 of expense each month to its monthly income statement.

If the future benefit of a cost cannot be determined, it should be charged to expense immediately. For example, the entire cost of a television advertisement that is shown during the Olympics will be charged to advertising expense in the year it is shown.