What is the matching principle?
Recording expenses in the same period as the revenue they helped produce. A coffee roaster records $3,000 of beans as cost of goods sold in the month of a $9,000 sale.
Definition
The matching principle puts a cost in the same period as the revenue it helped produce. On the books, the Income Statement pairs the sale with the cost of making that sale, not with the day cash left for supplies.
A coffee roaster that sells $9,000 of bags in June records $3,000 of bean cost in June too. Paying for those beans in May does not make May the expense month.
This is a pairing rule for the Income Statement. The cost sits beside the sale it helped produce, even if cash moved in a different month.
Where it shows up
Balance Sheet: Decreases in this account, reported as the inventory leaving the statement.
P&L: Increases expense in the same period as the related sale.
Cash flow: Decreases in this account, reported cash from operating activities is unchanged at the sale.
See also: Accrual Basis Accounting · Adjusting Journal Entry · Revenue Recognition
When you look at the Balance Sheet, inventory holds the bean cost until the bags sell. The sale is what moves that cost off the statement.
The Income Statement then shows the $9,000 of sales and the $3,000 of cost of goods sold in the same month. Gross profit for June is readable because the two numbers arrived together.
Cash does not have to move on the sale date. Cash flow from operations is unchanged by the matching entry itself, because the beans were already paid for or will be paid later.
Prepaid expenses follow the same pairing from another angle. Insurance paid in January is spread into the months the policy actually covers.
How it works
A cost waits on the Balance Sheet while it still has unused value. Inventory, prepaid coverage, and similar balances are waiting rooms.
When the related revenue is recorded, a slice of that cost becomes expense. For bags that sold, the slice is cost of goods sold; for a month of coverage, the slice is insurance expense.
An adjusting journal entry is often how the slice is booked at period end. Day-to-day inventory systems can post the same pairing when each sale is recorded.
Stay on matching cost to the sale. The calendar day cash moved is not what dates the expense.
An accrual records a cost that has been used even though the bill has not arrived. A deferral waits to expense a cost that was paid early; both tools exist so the pairing can hold.
The documents behind it are the sales tickets, the inventory count or the lot cost, and any prepaid schedule. Those papers show which costs belong beside which revenue.
Net income is readable only when the pairing holds. A month of sales with no product cost, or a month of product cost with no sales, misstates the leftover.
Example
Black Kettle Roasters sells $9,000 of bagged coffee in June. The beans inside those bags cost $3,000 and had been sitting in inventory.
When the bags leave, the pairing looks like this.
Debit: Cost of goods sold $3,000
Credit: Inventory $3,000
Inventory on the Balance Sheet falls by $3,000. Cost of goods sold on the Income Statement rises by $3,000 in the same month as the $9,000 sale.
June gross profit is $6,000. Paying for the beans in May did not move the $3,000 into May expense.
If the shop had expensed the beans when they were purchased, May would look heavy and June would look too rich. The sale and the bean cost would have missed each other.
Common mix-ups
The matching principle is not the same as cutoff. Cutoff dates an event to the period it happened; matching pairs a cost with the revenue it helped produce.
The matching principle is not the same as cash out the door. A May bean payment is not May expense if the bags sell in June.
The matching principle is not the same as accrual-basis accounting as a whole. Accrual-basis books use this pairing, but the method also covers when revenue itself is earned.
Related terms
- Accrual Basis Accounting: Recording revenue when earned and expenses when incurred.
- Accrual: Recording an expense or revenue when it happens rather than when cash moves.
- Deferral: Pushing recognition of a cost or revenue to a later period than the cash movement.
- Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
- Revenue Recognition: The rules for deciding when earned revenue may be recorded.
- Cost Of Goods Sold: The direct cost of the products sold during the period.
- Prepaid Expenses: Amounts paid up front for goods or services the business has not yet used.
- Cutoff: The rule that transactions land in the period in which they actually occurred.