Matching Concept and its Basis

Matching concept is a crucial accounting principle that states that expenses incurred by a business during an accounting period should be matched with the revenues generated during that same period. This concept forms the basis of accrual accounting and helps in determining the accurate profit or loss of a business.

Revenue = Profit

The matching concept establishes a relationship between revenue and profit, as expenses are deducted from revenue to arrive at the net profit of a business. Therefore, the equation Revenue = Profit can be rewritten as Revenue - Expenses = Profit. This implies that for a business to generate a profit, its revenue should exceed its expenses.

Expense as the Basis of Matching Concept

Expenses are the costs incurred by a business in the process of generating revenue. These expenses include salaries, rent, utilities, supplies, and any other costs that are necessary to operate the business. According to the matching concept, these expenses should be recognized in the same period in which the revenue they helped generate was earned.

For instance, if a business sells products worth $10,000 in June and incurs expenses of $6,000 in the same month, the matching concept requires that the expenses be recognized in June as well. This implies that the business made a profit of $4,000 in June.

Conclusion

In conclusion, the matching concept is a fundamental principle of accounting that ensures accurate reporting of a business's financial performance. The concept establishes a relationship between revenue and profit, with expenses forming the basis of the relationship. By matching expenses with the revenues they helped generate, businesses can accurately measure their profitability and make informed decisions about their operations.