Question: 

What is the Matching concept in Finance? 

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BeingSkilled's picture

Matching concept is the accounting practice in which businesses recognize revenues and their

expenses in the same accounting period.

  • Purpose of the matching concept is to avoid misstating earning for a period as then the profit and losses will be wrongly shown in financial statements. Also, all expenses should be mapped in the same accounting period or else the profits will be overstated which will lead to false assumptions about company’s growth.

  • Matching concept requires accrual accounting which means that the moment the revenues are earned or expenses are done, they are recognized then only. Actual cash flow may occur later too.

  • Profits can be defined as the difference of Revenue and Expenses.

  • Expenses of any previous year should not be factored in the current accounting year so

    income or expense done prior or later should not be included in the current year’s

    calculations.

  • Therefore it is prudent that Mr. Ramchandani matches the expenses done with the revenues

    his business generated to calculate the net profit failing in which the profits or the expenses can be overstated or understated.