Matching Concept

The matching concept is not an alternative to accrual accounting but an outgrowth of it. The matching
principle requires the matching of expenses with corresponding revenues. For example, a company that
pays commissions to its sales force would match the payment of commissions with the revenues from
sales: both are recognized in the same period. For instance, Christmas season sales in December 2010
might result in sales commissions that are paid in January 2011. Under the less sophisticated cash
system, this would mean that the the sales revenue is booked to the fourth quarter of 2010, and the
expense is booked to the first quarter of 2011. Matching applies both in the context of tax accounting
and financial accounting.

Internal Revenue Code

Tax law in the United States mandates matching in several contexts. Section 267 of the Internal Revenue
Code, for example, prohibits any deduction of a loss on the sale of property unless that loss is matched
with the payee's income item. Indeed, as the "Journal of Accountancy" noted in October 2006, tax law
"has broadened tax matching beyond the traditional matching of revenue and expenses to include
payer/payee matches," that is, to match the income of one taxpayer with the deductible expense of
another. On the other hand, there are many instances in which matching, as a general rule, does not
apply for tax purposes. The "Journal of Accountancy" cautions that certified public accountants "must
pay careful attention to the laws and regulations that govern these situations," which are complicated
and changing.

Journal Entries

The principle of matching is, to an extent, embedded in the foundations of double-entry bookkeeping,
even at the level of a day-to-day journal. Basic accounting convention requires that every journal entry
have an offset. Every entry of $100 on the debit side of a journal will occasion one or more entries on
the credit side, such as when materials purchased for inventory are matched with the cash expended to
purchase them.

Adjusting Entries

To ensure the desired matching of expenses and revenues at the end of a period, an accountant will
typically make certain "adjusting entries." For example, assume your business purchased one year of
liability insurance in a lump sum on January 1. The journal entry on January 1 is a debit for the
acquisition of an asset and a credit for the expenditure of the cash ($1,200). At the end of that month,
you have now consumed 1/12 of the value of that asset. You make an adjusting entry debiting the
insurance expense by 1/12, in this case $100, and credit (decrease the value of) the balance sheet asset
by the same amount. Thus, the portion of the insurance expense that is actually used in February ends
up on the books for February, matched with February revenues.