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Matching Principle in Accounting: Definition & Examples

Instructor: Jay Wagner

Jay holds a Masters of Business Administration

In accounting, matching has nothing to do with color coordination and everything to do with the timing of revenues and expenses. The matching principle helps to keep the financial statements a useful and fair representation of results.

The Matching Principle

It's likely that at some point in your life, you've purchased a big item that cost a lot of money, whether it was a car, a refrigerator or a similar item. Fortunately, the expense of these items wasn't just for a one-time use -- you paid to use that item over and over for an extended period of time. For example, you don't buy a new lawnmower every time your grass needs cutting. Instead, you buy a lawnmower and use it over and over for several years. Obviously it would be inaccurate to say that it cost you the $400 you paid for your mower to cut your grass once and then only maintenance and fuel to mow your lawn each time after that. If you cut your grass 20 times every year and your lawnmower lasts you 5 years, the mower costs you $4 (plus maintenance and fuel) each time you mow your lawn.

What we just did was match the cost of your mower to its utility to you. This is the matching principle in action: a one-time cost to purchase an asset was spread over the multiple time periods in which the asset was used.

Instead of a lawnmower, you might have engaged a mowing service and paid them $3,000 in advance to take care of your lawn for the same 5 years while you were going to be out of the country. This cost would also be spread over the time you paid for, with each of the (20 times per year x 5 years) 100 mowings costing you (3,000/100) $30 rather than the first one costing you $3,000 and the next 99 being free. As you can see, the matching principle applies to services as well as assets.

How the Matching Principle is Applied

There are two primary methods of applying the matching principle in accounting, but they are based on the same concept. Both depreciation and amortization allocate costs over time according to either actual use or a predetermined formula.

Businesses often prepay certain expenses such as insurance or purchase items such as office supplies before they need them. These are recorded as assets since the business is owed a service or owns unused items. They are then amortized over time. In the case of a prepaid expense such as an insurance policy, the amortization is simply the cost of the policy divided by the time for which the policy will be in effect. For example, a $2,700 premium paid in advance for a policy covering two years (24 months) would be amortized at a rate of (2,700/24) $112.50 per month, which would be recorded as insurance expense.

Amortization can also be based on use, as is the case with office supplies, and the calculations are only slightly more complicated. If a company starts the month with $120 worth of office supplies on hand, purchases $825 worth of office supplies during the month, and has $170 worth of office supplies on hand at the end of the month, they are amortizing (120 + 825 - 170) $775 worth of office supplies, recording the $775 as supplies expense. In practice, the word amortization is generally only used with assets like mineral rights or patents, but the principle is the same.

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