When someone ask about when shall we recognize an expense in corresponding to the revenue, we will think of matching principle. So what is matching principle?
Definition of Matching Principle
Similar to the accrual basis of accounting, the matching principle is the basic concept refers to the recognition of expenses of any particular period while those expenses are associated with the revenue generated for such period. So the wording of matching here normally refers the match between expenses and revenues meaning, we shall recognize expenses at the same time when the revenues are earned.
As an accountant, the important task is to measure the net income of an accounting period. The net income should reflect the real revenue and expenses for that particular period so that management or other stakeholders can use it for correct decision making.
For example, ABC Company is a service company provides repair and maintenance services to its clients. There are a number of staff with different specializations. 15 staff are technical staff specialize in printing and maintenance services especially for corporate industries. In January 2019, the company has successfully agreed with one big commercial bank in order to provide services on repair and maintenance of the printing equipment. The agreed service is US$2,000 per month. The company incurred labor cost and other materials and these costs are due to be paid in February 2019.
In this case, in accordance with the matching principle, such labor costs and materials incurred as result of the providing service need to be recognized as expenses at the same time that the company earns and recognize revenue.
Every business entities shall recognize expenses properly in corresponding to revenue earns by such entities in accordance with matching principle. This is similar to the accrual basis of accounting where expenses and revenues are recognized only when they are incurred or earned.