The matching concept is a business accounting practice that matches revenues with the expenses incurred to create them. When using the matching concept, a company recognizes revenues and their related expenses in the same accounting period, whether or not they actually occurred in the same period. This practice prevents companies from misstating their earnings or losses in a particular space of time.
Many companies use a quarterly accounting system in which one accounting period corresponds to one fiscal quarter. Four quarters make up a fiscal year or annual accounting period. At the end of each accounting period, companies release several accounting reports. These generally include a statement of changes in financial position, a statement of retained earnings, and an income statement. These statements help both owners and investors to evaluate the financial health of the company.
The matching concept is just one of several generally accepted accounting principles that help to make sure these reports are as accurate as possible. Without it, businesses might issue an inflated income statement because the expenses related to releasing a particular product into the market have not yet been tallied. This could result in an artificial sense of the company's worth, which might affect stocks and investment choices.
Accrual accounting is another generally accepted accounting practice that is often used to support the matching concept. When using accrual accounting, a company counts money as received as soon as it is earned and as lost as soon as it is owed. If a company knows that it will cost a certain amount to pay its employees, for example, that money is considered to be an expense as soon as the employee has worked, not on the second Friday of the month when paychecks are due.
Accrual accounting supports the matching concept by forcing the company to recognize debts, even if they have not been paid. Yet it also allows for money to be counted as an asset even if the customer has not yet paid it to the company. It is used by most companies worldwide.
Generally accepted accounting principles like the matching concept and accrual accounting consist of rules set by national and international organizations and of less formal industry-recognized conventions in accounting. International standards are set by the International Accounting Standards Board of the International Financial Reporting Standards Foundation. Individual countries have their own boards and organizations that set standards within each country. Although some of these standards are matters of convention, many have been coded into law as well.