2.2 The Matching Principle

The Matching Principle

• The matching principle states, "match the sale with its associated costs to determine profits."

• This means that the income statement shows revenue and the costs associated with producing that revenue, whenever those costs were incurred.

• In other words, the expenses on the statement are not necessarily those things that we purchased that period, or even paid for that period.

• The matching principle is the driving force behind an accurate and useful income statement.

• Remember, the overall goal is for the income statement to reflect the realities of the transactions.

• That means that we (and our accountants) must have an understanding of the business reality, rather than making assumptions about general types of transactions.

Matching Principle Examples

Now that you have watched the video, answer the questions below.