Generally accepted accounting principles, or GAAP, outline several principles for the recording of accounting information. The GAAP matching principle is one of several fundamental accounting principles that underlie all financial statements. The matching principle states that expenses should show up on the income statement in the same accounting period as the related revenues. This principle ties the revenue recognition principle and the expense principle together, so it is important to understand all three.
The GAAP matching principle states that expenses should be recorded in the same period as the resulting revenues.
Before you can tie expenses to revenue, you must know when revenue should be recognized in the accounting records. The revenue recognition principle tells accountants to record revenue when it is earned. From an accounting perspective, revenue is earned when the goods have been delivered, when a customer has taken possession of them or when services have been rendered. For example, once you complete a roofing job for a customer, your business has earned those fees. Regardless of when the customer actually pays you for the roofing job, you performed the work and are owed the money. Whether you debit (increase) cash or accounts receivable, you are going to credit (increase) your revenue on the transaction date.
Expense Recognition Principle
Expenses are to be recorded in your accounting records when goods are used or services are received. When you are deciding how to record an expense for goods, note that the principle mentions the goods being used. Receiving goods is not necessarily enough to make them an expense, even though paying for them might be a liability. When the goods are used by your business, they become an expense of the business. When someone performs a service for your business, whether as an employee or as a contract laborer, you have incurred an expense.
The Matching Principle
Some expenses do not make it to the income statement immediately. The matching concept is the guideline accountants use to be sure expenses are related to revenues and show up in the same period. One important result of the matching principle is the concept of depreciation. When you have fixed assets or durable equipment that you will use for more than one year, you will break up the cost of that asset over its expected life.
You may have a cash register, for example, that should have a life of about seven years. You would not want to record a purchase that cost several thousand dollars as an expense in that first year while you are first beginning to generate income. It would make it look like your business performed very poorly that year. You would instead divide the cost into years, if not months, for greater accuracy. You would record the portion each year rather than the entire cost to better relate it to the sales you made. This is the essence of the matching principle. It paints a more realistic picture of the business's operating performance on the income statement.