Matching Principle

Hey Yasaswi! Nice attempt explaining the matching principle, but there’s a little confusion here between accrual basis and cash basis accounting, and how the matching principle actually works.

Here’s a clearer explanation:

Matching Principle (in Accrual Accounting)

• Expenses should be recognized in the same accounting period as the revenues they help generate.

• So, if you buy something in 2021 but pay in 2022, under accrual accounting, the expense is recorded in 2021 (when you receive/use the goods or services), not when you pay.

• This means you record the purchase and the liability in 2021, and when you pay in 2022, you reduce the liability (payables).

Example (Accrual Basis):

Cash Basis Accounting

• Here, expenses and revenues are recorded only when cash is actually received or paid.

• So, if you buy something in 2021 but pay in 2022, the expense is recorded only in 2022, when cash is paid.

Example (Cash Basis):

Your statement:

“revenue & expenses will be recorded in 2022 as complete receipts is fulfilled in a year.”
This is true only under cash basis accounting but not under accrual accounting or the matching principle.

In short:

• Matching principle applies to accrual accounting and says expenses are matched with revenues in the period they occur, not when cash is paid.

• Cash basis ignores this and records only on cash movement.