Matching Process

The essence of the matching process or matching principle emphasizes the fact that expenses be matched with the revenues whenever it is reasonable and practicable to do so. In some cases, it is not difficult to match expenses with the specific revenues earned with the help of those expenses. The typical case in the association of cost of goods sold and the sales revenues. Both of them can be identified with a particular accounting period. It is noteworthy that expenses are not recognized when cash is paid or when the service is performed of when the product is produced; the expenses are recognized only when they make contribution to revenues. So the goods purchased are not recognized expenses. But when they earn revenues is the form of sales, they are recognized as expenses in the form of cost of goods sold. However it becomes difficult to determine the accounting period in which expense would generate the revenue e.g., expenses on advertisement. The business entity may derive benefit from advertisement expenses over a number of accounting periods. It would be wrong to treat the total amount spent on advertisement as expense in the year the cash was paid. Hence the advertisement expense would be allocated over more than one accounting period. This process is recognized in accounting as the accrual basis. The accrual basis attempts to match revenue and expense with the period of time. The word accrue refers to a system of recording revenues and expenses whether or not they are being received or expended in cash at the time of recording provided they are recognized for the period covered by the income statement. The general rules in accrual basis of timing and measurement of business income may be stated as:

(i)    Revenue that has been earned in the accounting period be reported in the income statement.

(ii)    As expense that has been recognized should be charged to revenue even though it has not been paid in cash or otherwise.

(iii)    An expense that has been paid in advance should not be associated with the specific or other revenue until it is recognized in the accounting period of the income statement.

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