Matching concept states that expenses that are incurred in an accounting period should be matching with the revenue earned during that period. Thus all expenses for that accounting period whether or not paid during that year and all revenue whether earned or not during the period should be considered to calculate profit or loss. Hence, depreciation of the current year is charged against the current year’s revenue. In other words, the full cost of the asset is not treated as an expense in the year of its purchase itself rather it is spread over its useful life.
Business concerns should follow this concept as :
1. Matching concept portrays the exact financial status of the business.
2. As revenue and expenses are matched, the profit or loss is not over or under-stated.
3. Expenditure of capital assets which span over a period cannot be determined in one accounting period. Hence, depreciation as an expense can be more suitable for calculating business profits.
4. It ensures transactions occurring in one accounting period although realised in another accounting period will be recognised for the accounting period in which it occurred.