Question

What is the relationship between Inventory and the Matching Principle?

Answer 1

Matching period in accounting states that an expense should be recognized in the same period when the revenue associated with it is earned.

Using this principle; the expenses related to inventory is calculated in terms of cost of goods sold; Suppose if a company has 1000 $ inventory and at one period 400$ inventory has been sold, the 400$ will be shown in incomes statement as cost of goods sold(as expense) which is associated with the selling of the inventory. Whereas in balance sheet, the net inventory value will come down to 600$.

This means that once a product is manufactured and kept as inventory, its expense will be registered in the income statement only if the product has been sold and revenue is earned.