Matching principle

In accrual basis accounting, the matching principle dictates that an expense should be reported in the same period as the corresponding revenue is earned.

According to the matching principle in accrual accounting, expenses are recognised when obligations are incurred, regardless of when cash is paid.

Cash can be paid out either before or after the obligations are incurred (when goods or services are received), leading to the following two types of accounts: Accrued expenses are liabilities with uncertain timing or amount, but the uncertainty is not significant enough to classify them as a provision.

When the promise to pay is fulfilled, the related expense item is recognised, and the same amount is deducted from prepayments.

The commission is recorded as accrued expenses in the sale period to prevent a fictitious profit.

It is then deducted from accrued expenses in the subsequent period to prevent a fictitious loss when the representative is compensated.

For example, when accounting periods are monthly, an 11/12 portion of an annually paid insurance cost is recorded as prepaid expenses.

Similarly, cash paid for goods and services not received by the end of the accounting period is added to prepayments.