Matching Revenue and Expenses -
Matching Principle:
Learning Objectives:
-
Define and explain the term "matching principle".
To
determine net profit for any particular accounting
period, we use the matching principle. The
word matching refers to the close relationship that
exists between certain expenses and the revenue
realized as a result of incurring these expenses. In
other words, revenues of the relevant accounting
period should be matched against the expenses of the
same period to ascertain profits or losses made by
the business.
In the
form of an equation it may be stated that:
|
Profit = Revenue - Expenses |
Again
it should be noted that this year's expenses are
associated with this year's revenue. We do not
compare this year's expenses with last year's
revenue because there is no close relationship
between the two.
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