What is the matching principle?
The matching principle links costs to the revenue they produce. If you earn revenue in March, the costs that helped earn it should also appear in March, even if you pay for them in April or paid in January. This gives a fair picture of profit for each period.
How it's applied
- [Cost of goods sold](/glossary/cost-of-goods-sold): stock is expensed when sold, not when bought.
- [Depreciation](/glossary/depreciation): an asset's cost is spread over the years it helps generate revenue.
- [Accrued expenses](/glossary/accrued-expenses): costs incurred but not yet billed are recorded.
- [Prepaid expenses](/glossary/prepaid-expenses): costs paid in advance are spread over the periods they benefit.
- Commissions: recorded in the period of the related sale.
Example
A salesperson earns a $1,000 commission on December sales, paid in January. The commission is recorded as a December expense with an accrued liability, matching it to December's revenue.
Matching vs cash basis
Under the cash basis, expenses are recorded when paid, so a period can look unusually profitable or unprofitable based on payment timing. The matching principle, part of the [accrual basis](/glossary/accrual-basis), avoids this.