Question

What is the theory behind the matching principle? In what method of accounting, accrual or cash, does the matching principle apply?

Answer 1

The theory behind the matching principle is to record and report an expense in the same period in which the corresponding revenue is recorded and reported. Thus, the expenses incurred in earning the revenue should be recorded in the same period in which the revenue is recorded.

The matching principle applies to the accrual basis of accounting wherein the expenses are recorded when incurred irrespective of when payment is made and the incomes are recorded when earned irrespective of when the cash is received for the same.

Hence, under the matching principle and accrual basis the expense is recorded in the same period when the income is recorded irrespective of whether the payment of the expense is made in the same period or not.