Matching Principle

Matching principle gives guidance as to when expenses are recognized.

Matching principle states that expenses are recognized in the same period as the related revenues are recognized.  Meaning, expenses recognition is driven by a matching process.

There’s a relationship between the realization principle and matching principle.  When revenue is recognized in a particular period, all the expenses incurred in generating such revenue must also be recognized.

Note that not all expenses are directly caused by generating revenues. There are expenses which are incurred but indirectly associated to generate revenue.

Approaches in recognizing expenses are as follows:

1. Some expenses are recognized based on the exact cause-and-effect between revenue and expense event. 

There is a cause-and-effect relationship or direct relationship between revenues and expenses.
Such expenses pertain to the cost to sell or cost to produce goods and services. 

These are the cost of service or cost of goods sold or cost of sales. 

Another example for this approach is the sales commission paid for obtaining revenues.

2.  By associating the expenses with the revenues recognized in a particular period. 

There are expenses which are not directly cause by a revenue event.  However, some expenses can be related to the time period during which the revenue is earned.

For example, the monthly salary paid to employees is not directly associated to any revenue event. Employees render services during the month and indirectly relate to the recognized revenue in that period.

3.  By systematic and rational allocations to specific time periods. 

Some expenses are recognized or allocated to a specific time period.  There are costs which are incurred to acquire assets that benefit more than one reporting period.  Such costs are systematically and rationally allocated periodically. 

Examples are the systematic and rational allocations of some prepaid expenses, depreciation and amortization expenses.

4.  In the period incurred, without regard to related revenues.  

This approach is called for in situations when costs are incurred but it is not possible to determine in which time periods to recognize.   

Example is the marketing and advertising expenses.  It is difficult to determine how much is expended in generating incremental revenues.  Because of this, such marketing and advertising expenditures are recognized at the period they are incurred.

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