The Matching Principle

The matching principle is basically matching up all the expenses and any other costs of doing business that a company incurred during the current accounting period with all the revenue that the company took in during that same time. However, it should be noted that in order to understand the matching principle, the revenue recognition principle has to be understood, because expenses incurred in order to create revenue should be reported when the revenue is recognized. Some companies try to use revenue recognition principle to their advantage. For instance, a salesperson for Cisco Systems can make arrangements with a customer to order surplus inventory that gets delivered and invoiced right before the current accounting period is over. This way the salesman can get a bonus, and the customer can return the goods at the start of the next reporting period. The matching principle has to be applied in a situation where an equipment has to be depreciated over the expected useful life. Also, the principle should be applied when a company pays for insurance or licensing fees. Typically, the company gets billed every 6 months or every one year, but they enjoy the licensing and the insurance coverage every month, so the monthly cost should be matched to the corresponding revenue.