What does GAAP stand for? Explain 'Matching Concept of GAAP'.

GAAP stands for Generally Accepted Accounting Principles. These are the concepts, conventions, rules and standards which are widely accepted and adopted by accountants. According to Robert Anthony, "the rules and conventions of accounting are commonly referred to as principles." GAAP makes financial statements comparable and useful to various users.

Matching Concept of GAAP — According to the Matching Principle, the cost of a particular period should be charged from the revenue of the same period only. Only such matching of cost with revenue can reveal the true profit or loss for that period. Revenue must be ascertained first for a period, and then the costs of that period should be charged against 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 revenues is based on the accrual system of accounting.

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

1. When an item of revenue is included in the Profit & Loss Account, all expenses incurred on it — whether paid or not — should be included. Outstanding expenses are therefore debited in the Profit & Loss Account.
2. If an amount has been spent but the revenue from it will be earned in the next year, the amount should be carried forward as a prepaid expense (asset).
3. Cost of goods remaining unsold at the end of the year must be carried forward as closing stock to the next year.
4. Incomes received in advance must be treated as a liability, while income earned but not received must be recognised as revenue.