When to Use Matching Principle?
1. Recording Revenues and Expenses: Whenever a business earns revenue or incurs expenses, the matching principle should be applied to recognize these transactions in the same accounting period. This ensures that expenses are matched with the revenues they help generate, providing a true depiction of the company’s profitability for that period.
2. Project-based Accounting: For businesses engaged in project-based work, such as construction companies, consulting firms, or software development companies, the matching principle should be applied to allocate project-related expenses (e.g., labor, materials, overhead) to the period in which the associated revenue is recognized.
3. Depreciation and Amortization: When accounting for the depreciation of fixed assets or the amortization of intangible assets, such as patents or trademarks, the matching principle should be used to allocate the cost of these assets over their useful lives. This ensures that the expense is matched with the revenue-generating capability of the asset over time.
4. Inventory Costing: In inventory accounting, the matching principle is essential for determining the cost of goods sold (COGS). Expenses related to the purchase or production of inventory, such as raw materials, labor, and overhead, should be matched with the revenue generated from the sale of those inventory items.
5. Prepaid Expenses and Deferred Revenue: When dealing with prepaid expenses (e.g., prepaid rent, prepaid insurance) or deferred revenue (e.g., unearned revenue), the matching principle should be used to recognize the expense or revenue in the appropriate accounting period when the benefit is realized or earned.