Matching principle.
In plain English
The matching principle requires a business to record costs in the period when the related revenue is recognized, rather than when the cash for those costs happens to be paid. It is why a manufacturer moves the cost of a product out of inventory and into cost of goods sold on the day the product sells, not the day it was built. It is also why long-lived assets are depreciated across the years they help generate sales instead of expensed all at once. Without matching, a company could look wildly profitable one period and deeply unprofitable the next for no real reason. The principle is one half of accrual accounting, paired with revenue recognition.
01Why it matters
It is the reason a company's monthly profit line tells you something about how the business performed, rather than just showing you which month the invoices happened to clear.
02The math, step by step
Say a shop buys 2,000 dollars of inventory in June and sells half of it in July for 2,500 dollars. June profit is not minus 2,000 dollars. July shows 2,500 dollars of revenue against 1,000 dollars of cost, for 1,500 dollars of gross profit, and the other 1,000 dollars stays in inventory.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Matching has nothing to do with when the check goes out. A cost can be paid in January and expensed in September, or expensed in September and paid the following March. The trigger is the revenue it supports, not the payment date.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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