According to the matching concept all expenses matched with the revenue of that period should only be taken into consideration.
What is Matching Concept?
If the financial statements of the organization if any revenue is recognized then expenses related to earn that revenue should be recognized.
Moreover, this concept is based on accrual concept as it considers the occurrence of expenses and income. And do not concentrate on actual inflow or outflow of cash.
This leads to adjustment of certain items like prepaid and outstanding expenses , unearned or accrued incomes.
Further, it is not necessary that every expenses identify every income. Some expenses are directly related to the revenue and some are time bound.
According to the matching concept all expenses matched with the revenue of that period should only be taken into consideration.
Example of matching concept:
Selling expenses are directly related to sales but rent , salaries etc. are recorded on accrual basis for a particular accounting period. In other words periodicity concept has also been followed while applying matching concept.
Mr. S K started cloth business. He purchased 12,000 pcs. garments @ ₹100 per piece and sold 10,000 pcs @ ₹140 per piece during the accounting period of 12 months 1st January to 31st December ,2023. Further, he paid shop rent @ ₹5000 per month for 11 months and paid ₹12,00,000 to the suppliers of garments and received ₹12,00,000 from customers.
Let us see how the accrual and periodicity concepts operate.
Periodicity concept fixes up the time frame for which the performance is to be measured and financial position is to be appraised. Here, it is January 2023 – December 2023. So revenue and expenses are to be measured for the year 2023 and assets and liabilities are to be ascertained as on 31st December 2023.
Accrual concept operates to measure revenue of ₹ 14,00,000 (arising out of sale of garments 10,000 Pcs x ₹140) which accrued during 2023, not the cash received ₹12,00,000 and also the expenses correctly. Further, shop rent for 12 months is in expenses item amounting to ₹60,000 not ₹55,000 the cash paid.
Should the accountant treat ₹12,00,000 as expenses for purchases of merchandise ? And should he treat ₹1,40,000 as profit? (Revenue ₹14,00,000- Merchandise ₹12,00,000-shop rent ₹60,000). Obviously the answer is No. Matching links revenues with the expenses.
Revenue-Expenses = Profit
But this unqualified equation may create misconception . It should be defined as :
Periodic Profit = Periodic Revenue – Matched Expenses
In other words, from the revenue of an accounting period such expenses are deducted which are expended to generate the revenue to determine profit of that period .
Furthermore, in the given example revenue relates to only sale of 10,000 pcs of garments. So the cost of 10,000 pcs of garments should be treated as expenses.
| ₹ | ₹ | |
| Profit = Revenue | 14,00,000 | |
| Loss = Expenses Merchandise Shop rent | 10,00,000 60,000 | |
| (10,60,000) | ||
| 3,40,000 | ||
| Assets : Inventory (2,000pcs x ₹100) Trade receivables Cash (Cash receipts ₹12,00,000-cash payments ₹10,55,000) | 2,00,000 2,00,000 1,45,000 | |
| 5,45,000 | ||
| Liabilities: Trade payables Expenses Payables Capital(Profit) | 2,00,000 5,000 3,40,000 | |
| 5,45,000 |
