Explain the concept of the Matching Principle.

According to the Matching Principle, the cost of a particular period should be charged from (matched against) the revenue of the same period only. Only such matching of cost and revenue can reveal the true profit or loss for that period. Revenue must first be ascertained for the period, and then the costs incurred in earning that revenue must be charged against it. The matching of costs with revenue is based on the accrual system of accounting.

While matching costs with revenues, the following points must be considered:

1. All expenses relating to the accounting period — whether paid or not — must be taken in the account.
2. Expenses paid in advance should be taken in the account.
3. All incomes earned during the accounting period, recieved or not should be taken into account.
4. Income received in advance must not be taken into accounts.