Define a Matching Concept

Q. Define a matching concept and explain why a business concern should follow this concept.

Answer:- Matching concept states that all the expenses sustained during the whole year long, whether they are paid or not, and all the revenues generated during the whole year, whether obtained or not, should be taken into account while calculating the profit of the year. In simple words, expenses sustained should be set against the revenue obtained in the same period to demonstrate profit or loss. 

For example, you pay an insurance premium for a year of Rs 1200 on July 01, and if the accounts are closing on March 31, then the insurance premium of the same current year will be demonstrated for nine months from July to March, and it will be calculated as, 

1200-900 = 300

In this calculation through the matching concept, the expense of 900 will be considered, and 1200 will not be taken for determining the profit because only 900 is benefited in the current accounting period.   

A business concern should follow the matching concept primarily to confirm the true profit or loss made during the current accounting year or period. In the same year or period, the business concerned may pay or obtain payments that may or may not relate to the current year. In this way, it might lead to overcasting the profits or loss or might as well undercast the profits or loss because this might not reveal the true efficiency of the business and its recreations in the accounting year. This concept also shows the business’s financial status and where the business stands. It also smooths out the income statement. It is also important for an investor to study the company’s cash flow and the income statement to get an idea of the company before the investment.