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MATCHING OF REVENUES AND EXPENSES

One of the most important concepts of the accounting is the matching concept. This concept provides the guidelines as to how the expenses be matched with revenues. Expenses incurred in an accounting year should be matched with the revenues recognized in that year. But at the same time only such expenses as incurred in creating revenues during the period should be deducted from those revenues for earning the income or profit during the period. The ultimate aim of the accounting is to construct the accounting record in such a manner so as to compare the cost with revenue.

Either the comparison of costs is not possible or it is likely to be difficult. Suppose these types of situations arise when the accounting system will be considered as unsatisfactory. In order to make a satisfactory accounting system a current matching of revenue as against the expenses will be followed i.e., incurred expenses will be followed and matched against the realized income.

American Institute of Certified Public Accountants Committee on accounting procedure states that “it is plainly desirable to provide by charging in the current income statement, properly classified for all foreseeable costs and losses applicable against current revenues, to the extent that they can be measured and allocated to fiscal periods with reasonable approximation”. Only current year expenses/incomes are taken into account. Suppose either previous year or subsequent year’s expenses or incomes, paid or received should be adjusted properly i.e., if any of the current year expenses are due, it should be added to the respective expenses or deducted if paid in advance.

And if any income of the current year is due but not received, it is added to the respective incomes. Suppose it should be received for the subsequent years, it means it is deducted from the respective income.

Based upon this principle only current year expenses are matched with the current year realized revenue. By application of this matching concept, proprietor can easily determine their firm’s profit or loss and he can take additional effort to increase the earning capacity of the concern if necessary.