The Matching Principle by nettTracker

The Matching Principle by nettTracker

The Matching Principle is part of the Generally Accepted Accounting Principles (GAAP). Income and expenditure are matched based on dates when events happen / the work is done.

When we are following true accrual accounting, it is important that any expenditure incurred to produce a sale, or deliver a service, is appropriately reflected in the same month as the income to which it relates. Any sales recorded should accurately reflect the period when the products or services are delivered.

Supplier invoices for general overheads, such as ‘marketing’, or ‘insurance’ could be dated January, but the total cost relates to a future period; February to January of the following year as an example. So again, the cost needs to be apportioned to each month.

In a previous blog post ‘Cash v Accrual’, some of the different accounting adjustments are explained (Prepaid Expenses, Deferred Revenue), and these adjustments are required to follow the ‘matching principle’.

Here is a simple example of the ‘matching principle’. A cleaning business sends an ‘annual’ invoice to a customer for services that relate to the next 12 months. The employees that do the work are paid monthly. The annual invoice needs to be ‘Deferred’ so that the income is reflected over the next 12 months, and appropriately ‘matches’ the employee costs incurred to carry out the services.

The same buiness could have purchased cleaning materials ‘stock’. This works like a prepayment. When stock is used in order to do the required work, accounting adjustments should be made to reduce the stock, and increase the costs associated with the service provided to the customer.

Quick summary of the ‘Matching’ principle:

Ensure that bills and invoices are reflected in the period to which they actually relate. For turnover and costs of sales especially, this will help to ensure that gross profit margins are reported accurately every month.