Matching Concept in Accounting Explained
Definition, Meaning, Application
Business Encyclopedia ISBN 978-1-929500-10-9. Revised 2014-04-16.
The matching concept is a primary differentiator between accrual accounting and cash basis accounting. With the matching concept, revenues are reported along with the expenses that brought them in the same period.
The matching concept is an accounting practice whereby expenses are recognized in the same accounting period as the related revenues are recognized. The period's revenues, that is, are reported along with the expenses that brought them.
The matching concept thus helps avoid misstating earnings for a period. Reporting revenues for a period without reporting all the expenses that brought them, and just those expenses, could result in overstated or understated profits.
Applying the concept requires accrual accounting, the practice of recognizing revenues when they are earned and expenses when they are incurred--not necessarily when cash actually flows in those transactions.
In the US, accounting concepts such as the matching concept and accrual accounting are recognized in the GAAP (Generally Accepted Accounting Principles) and the organizations behind GAAP (e.g., the Financial Accounting Standards Board, FASB). Other accounting concepts similarly recognized include the materiality concept (the principle that trivial matters are to be disregarded and all important matters are to be disclosed), and the historical cost convention by which transactions are recorded at the price prevailing when the transaction is made.
The Matching Concept in ROI and Other Financial Metrics
One form of the matching concept plays an important role giving meaning to financial metrics used in business case and investment analyses. Metrics such as payback period, internal rate of return (IRR), and return on investment (ROI), for example, compare cash inflows to cash outflows in different ways. The comparison—the resulting financial metric—has meaning only when the inflows under analysis are brought by the outflows in the analysis, and only by those outflows.
In a complex business environment, objectives for such things as sales revenues, market share, employee productivity, product quality, or customer satisfaction, are usually approached through multiple actions and initiatives. The analyst producing an "ROI" for a specific investment, action, or acquisition, however, must claim that the measured returns are matched appropriately with (and only with) the costs that brought them. In the complex business environment, wise decision makers will test or question that claim before trusting the ROI.
For examples showing the use of ROI and other financial metrics in business case analysis, so as to reflect only the costs and benefits directly resulting from an action, see the encyclopedia entries for
By Marty Schmidt. Copyright © 2004-.