'Matching Principle of Accounting' : Revenue must be ascertained first for a period and then the cost of that period should be charged to it. When cost is associated with a particular product or service, revenue earned from that product or service should be matched to its cost. This principle provides the guidelines as to how the expenses are to be matched with revenue. It requires that in determining the net profit, all costs which are applicable to revenue of that period should be charged against that revenue.
While matching, costs with revenues, the following points must be considered :
(i) When an item of revenue is included in the Profit and Loss Account, all expenses incurred on it whether paid or not, should be included in the Profit and Loss Account. Outstanding expenses are debited in the Profit and Loss Account on this basis.
(ii) If an amount is spent, but revenue from it will be earned in the next year, the amount should be carried down as an asset and should be shown as an expense next year. Prepaid expenses, are shown as assets in the Balance Sheet on this basis.
(iii) Cost of goods remaining unsold at the end of the year together with expenses incurred on them must be carried forward to the next year. Therefore, closing stock is carried over to the next year as opening stock.
(iv) Incomes received in advance must be treated as a liability, while income earned but not received should be recognised as revenue.