Friday, May 29, 2009

What is Matching Principle?

What is the matching principle and what is its importance in accounting?

The matching principle concept states that expenses incurred in a period must be matched against incomes earned in that same period in order to correctly evaluate the financial performance of the business. The matching principle is fundamental to the correct preparation of financial statements.

The matching concept, alongside the accrual concept, justifies end-of-year adjustments prior the preparations of final accounts and the preparation of financial statements.

Importantly, underlying the matching principle and GAAP is the idea that the market system needs quality financial information for decision taking and profitability is the major indicator of economic performance. It is vital for the health and wealth of nations that businesses can be reliably compared both nationally and internationally using the same measuring standards. Thus, there is a great need for the matching principle in accounting.

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