The matching principle is an accounting concept that matches all revenues with the expenses generated to earn those revenues during the accounting period. The accrual accounting method, for example, is based on the matching principle, as it records financial transactions as they occur, rather than when cash changes hands. Accountants also use this principle when posting journal entries, as each entry must contain a debit and a credit.

The traditional accounting equation of Assets = Liabilities + Owner’s Equity is also based on the matching principle. The equation requires all financial transactions to balance during each financial accounting period; this allows financial statements to be accurately prepared from the company’s general ledger. Improperly prepared financial statements can distort the company’s true financial position for internal and external stakeholders.

Accountants typically follow the matching principle for the income statement account in the general ledger as well. These accounts include sales, sales discounts, cost of goods sold (COGS) and selling and administrative expenses. The principle is used as accountants prepare and post journal entries; each entry must include a debit and credit that balances the entry prior to posting in the general ledger.

The matching principle also has a cause and effect relationship with financial transactions occurring from normal business operations. Each dollar spent must have an offset, such as wages paid or items purchased for the business. Sales entries contain sales to customers matched with the inventory cost for the item sold; materials purchased for sale are matched with the spent cash; wages paid are matched with the liability owed to employees. The accrual accounting method uses the matching principle as a self-balancing tool to maintain the accuracy of the general ledger.

The matching principle also makes extensive use of accruals and deferrals to balance general ledger accounts when no information has been posted to the accounts. Companies may experience a lag in posting certain expense items to their general ledger. Common examples of these lag items are utilities expenses, freight expenses or payroll expenses.

To correct a lag situation, accountants often will post accrued expense amounts that represent the normal monthly expense amount. These accruals maintain the standards of the matching principle since all revenues will be matched with the expenses incurred to generate those revenues in the same period.

Financial transactions must be recorded in the general ledger according to the standard accounting guidelines in the accounting industry. In the United States, the Financial Accounting Standards Board (FASB) writes and issues accounting guidelines for companies to follow when conducting business.