What is the matching concept? Why should a business concern follow this concept? Discuss.
What is the matching concept? Why should a business concern follow this concept? Discuss.
The process of ascertaining the amount of profit earned or the loss incurred during a particular period involves deduction of related expenses from the revenue earned during that period. The matching concept emphasises exactly this aspect.
It states that expenses incurred in an accounting period should be matched with revenues during that period. It follows from this that the revenue and expenses incurred to earn these revenues must belong to the same accounting period.
As we know that revenue is recognised when a sale is complete or service is rendered rather when cash is received. Similarly, an expense is recognised not when cash is paid but when an asset or service has been used to generate revenue, e.g., expenses such as salaries, rent and insurance are recognised on the basis of the period to which they relate to and not when these are paid. Similarly, costs like depreciation of the fixed asset are divided over the periods during which the asset is used.
A business concern should follow this concept otherwise it will be very much difficult to ascertain the profit or loss for a given period of time.
The process of ascertaining the amount of profit earned or the loss incurred during a particular period involves deduction of related expenses from the revenue earned during that period. The matching concept emphasises exactly this aspect.
It states that expenses incurred in an accounting period should be matched with revenues during that period. It follows from this that the revenue and expenses incurred to earn these revenues must belong to the same accounting period.
As we know that revenue is recognised when a sale is complete or service is rendered rather when cash is received. Similarly, an expense is recognised not when cash is paid but when an asset or service has been used to generate revenue, e.g., expenses such as salaries, rent and insurance are recognised on the basis of the period to which they relate to and not when these are paid. Similarly, costs like depreciation of the fixed asset are divided over the periods during which the asset is used.
A business concern should follow this concept otherwise it will be very much difficult to ascertain the profit or loss for a given period of time.
