Struggling to understand how to use the matching concept in accounting? Then, read this guide to understand the meaning of the matching concept, how to use the matching principle when it comes to preparing accounts and see some examples of the concept.
Table of contents
1. What is the Meaning of the Matching Concept?
The matching concept in accounting is part of the accruals basis in accounting. The matching principle requires income earned and expenses incurred to be matched during the accounting period under review. This means the financial statements are accurate because the right amount of income and expenses have been declared.
2. How Do You Use the Matching Principle?
The matching principle should be used whether you are preparing management accounts or year-end financial statements to ensure accuracy in business turnover and expenses. Otherwise, businesses may be able to manipulate their figures to increase turnover, profit and expenses for example.
3. Examples of the Matching Concept
Use these examples of the matching concept to understand how to apply this principle when it comes to preparing accounts:
Example 1
A business has a financial year end of 31 December 2021. On 31 December 2021, it invoices a customer for work undertaken of £10,000 during the same month and records this as income. On the same date, the business is awaiting an invoice from a supplier for project costs of £5,000. The outstanding supplier invoice would need to be recognised in the December 2021 accounts so that income is matched to their expenses.
This is why where businesses are audited, work is carried out to review post year end supplier invoices to give comfort to the auditors that the matching principle is applied to the financial statements that they are checking.
Example 2
A business has a financial year end of 31 March 2022. As at 31 March 2022 an invoice for rent has not been received from the landlord for the first quarter, 1 January 2022 to 31 March 2022. An accrual needs to be made for the unpaid rent so that expense correctly matches the income being declared.
Example 3
A business has a financial year end of 30 September 2021. On 30 September 2021, the business was late invoicing its customers for work carried out during the financial year 2021 of £20,000. The ensure income is stated correctly in the financial statements, an accounting adjustment needs to be made to include the unbilled income in turnover as accrued income in the books. That way, income matches the expenses of the business in the accounting period and profit, along with any tax owed, is accurate.
4. What is the Difference Between Matching Concept and Accruals Concept?
The matching concept forms part of the accruals concept. Under the accruals concept income and expenses are recognised when they were invoiced or billed during an accounting period. That means accountants need to use the matching concept to match income and expenses correctly and might need to calculate accounting adjustments like:
- Trade debtors
- Trade creditors
- Accruals
- Prepayments
When it comes to self-assessment tax returns, HMRC permits sole traders to use the cash basis when declaring their figures in the self-employment of their tax return to simplify reporting.
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Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
