Explain Matching Principle of Accounting.

According to the Matching Principle, the cost of a particular period should be charged against the revenue of the same period only. Only such matching of cost and revenue can reveal the true profit or loss for the period. Revenue must be ascertained first for a period, and then the costs of that period should be charged to it. When cost is associated with a particular product or service, the revenue earned from that product or service should be matched to its cost.

The matching of costs with revenue is based on the accrual system of accounting. While matching costs with revenue, the following points must be considered:

(a)All expenses related to accounting — whether paid or not — should be included. Outstanding expenses are debited in the P&L Account on this basis.

(b) Expenses paid in advance should be carried forward as prepaid expenses and shown as assets in the Balance Sheet.

(c) Cost of goods remaining unsold at the end of the year (along with related expenses) must be carried forward to the next year as closing stock.

(d) Incomes received in advance must be treated as liabilities, while income earned but not received should be recognised as revenue.

This principle ensures that the income statement reflects the true profitability of the business for that period.