What is the matching principle? Definition, examples, and when to use it

The matching principle is fundamental to accrual accounting but can be tricky to put into practice, especially if you’re in the 38% of business owners who don’t use bookkeeping software to automate time-consuming accounting processes.

This article breaks down what you should know to follow the matching principle correctly. Learn how it works, its relationship with the revenue recognition principle, and some of the biggest challenges you’re likely to face along the way.

Jump to:

• Understanding the matching principle in accounting
• The matching principle and accrual accounting
• Example of the matching principle in action
• Matching principle vs. Revenue recognition principle
• Why is the matching principle important for your business?
• Challenges of the matching principle
• Streamline your accounting and save time

Understanding the matching principle in accounting

The matching principle is an accounting concept that says you should record expenses in the same period as the revenues they help bring in. Recognizing related costs and revenues at the same time helps your financial statements reflect your actual financial performance.

Following the matching principle is also part of Generally Accepted Accounting Principles (GAAP) compliance, which is often expected by serious lenders and investors.

The matching principle and accrual accounting

The matching principle goes hand-in-hand with the accrual basis of accounting. Under accrual, you recognize revenues when you earn them and expenses when they happen, independent of when cash actually changes hands. It’s the opposite of the cash basis, which simply involves recording transactions as you collect and receive funds.

Since the accrual basis separates transaction recognition from the timing of cash flows, it lets you apply the matching principle. Together, they help you create more meaningful income statements, making sure costs aren’t just recorded when they happen, but also in the same period as the revenues they help you earn.

Example of the matching principle in action

Depreciation is a great example of how the matching principle works in real life. When you buy something expensive, like a vehicle or piece of equipment, the accrual basis of accounting doesn’t let you expense it right away. 

Instead, you need to add the cost onto the balance sheet as an asset, then depreciate it over the asset’s useful life. This matches the timing of the expense to the period in which you expect the asset to help you earn.

For example, if you bought a $25,000 robot with a 10-year useful life, you couldn’t claim all $25,000 as an expense upfront. 

Instead, here’s how to depreciate the asset:

• Capitalize $25,000 as a fixed asset onto the balance sheet
• Record $2,500 of depreciation expense over the next 12 months (assuming you use the straight-line method)
• Continue recording $2,500 of depreciation annually until the book value of the asset reached zero

Year-end wage and bonus accruals are another good example of the matching principle. For instance, if your employees earned wages or bonuses in December but got paid the following January, you’d still deduct the cost of their labor in December. This would match the expense to the period their work contributed to your bottom line.

Matching principle vs. Revenue recognition principle

The matching principle is closely related to another accrual accounting concept: the revenue recognition principle. It says you need to record revenue when it’s both earned and realized (i.e., you’re reasonably certain you’ll be collecting), regardless of when the cash hits your account.

While these two go hand-in-hand, making your income statement more useful from different angles, they’re still distinct. Here’s how each accrual principle compares:

The revenue recognition principle

The revenue recognition principle means you should recognize revenues in the period you earn them.

For example, say you provide consulting services in December, invoice your customer at the end of the month, and get paid the following January. The revenue recognition principle would have you record your revenue in December.

The matching principle

The matching principle means you need to record expenses tied to a given amount of revenue in the same period you recognize related income.

For instance, say you hired a subcontractor to help you deliver the consulting services from the previous example. The matching principle would have you deduct the cost in December, the same period in which you claimed the related revenue.

Why is the matching principle important for your business?

Here’s why the matching principle matters for your small business.

Ensures accurate profitability and performance measurement

The matching principle helps you create a more realistic record of your business’s financial performance. When you report costs alongside the revenues they help bring in, you avoid skewing your results with timing inconsistencies.

If instead, you recognize expenses too early or too late, you could distort your net income in two periods—artificially inflating profits in one while understating them in another.

Promotes consistency in financial reporting

Consistency is key in financial reporting, and the matching principle is the key to consistency. When you always record expenses in the same period as their related revenues, your financial statements (especially your income statement) follow a uniform timing. That makes it easier to compare your performance across accounting periods.

This helps internal stakeholders, like you and your managers, make better informed strategic decisions. Similarly, it gives external stakeholders, such as prospective lenders and investors, reliable data they can use to decide if they want to work with you.

Supports proper asset depreciation and amortization

The matching principle is the reason you spread the cost of long-term assets over the period you expect them to help your business. It’s called depreciation for tangible assets, like vehicles or buildings, and amortization for intangible assets, like patents or trademarks.

For example, say your business buys a patent for $20,000 with a 10-year useful life. Instead of deducting $20,000 upfront, you would amortize the amount over the next 10 years. Under the straight-line method, that would create $2,000 of amortization expense each year during the decade the patent contributes to your business.

Challenges of the matching principle

Matching expenses to related revenues creates more useful financial statements, but it’s sometimes easier said than done. Here are some of the challenges you may face when trying to follow the expense recognition principle.

Difficulty in direct cause-and-effect correlation

It’s not always possible to spot a clear link between costs and a specific revenue stream. It can be especially tough for expenses whose impact on revenue is hard to measure, like marketing or research and development.

Accountants often rely on estimates and reasonable allocations in these cases. For example, you might deduct the cost of a rebranding campaign over the three-month period you expect it to boost sales, even though there’s no way to be sure of its impact.

Estimating useful life and allocation for long-term assets

Determining the useful life of a long-term asset for financial accounting purposes can be tough. You have to use your best judgment to estimate how long the asset will remain economically beneficial, which is often uncertain.

In addition, even seemingly small shifts in your estimates can have a significant impact on how your costs are matched to revenues over the years. For example, depreciating a $35,000 piece of equipment over an eight-year versus a 12-year useful life could swing your annual deduction by more than $1,400.

Impact of non-directly attributable expenses

Some expenses are necessary for your operations but don’t directly contribute to a specific revenue stream. For example, this often includes general and administrative (G&A) expenses, like office rent, utilities, and business insurance.

In these cases, the matching principle may not apply. When a clear revenue match simply isn’t feasible, you typically record the expense in the period it occurs in, following the basics of accrual accounting.

Streamline your accounting and save time

The matching principle says you should record expenses in the same period as the revenues they help you bring in. This improves the accuracy, consistency, and comparability of your financial reporting, benefiting your internal and external stakeholders.

Simplify your accrual accounting with QuickBooks accounting software. The intuitive dashboard and real-time reporting tools streamline routine reporting tasks so you can spend less time worrying about the books and focus on running your business.