Matching Principle

To provide Useful and Helpful financial reporting and implement fundamental qualities
GAAP has four basic assumptions, four basic principles, and four basic constraints and
matching principle is one of four basic principles
Explanation:
Expenses have to be matched with revenues as long as it is reasonable to do
so. Expenses are recognized not when the work is performed, or when a
product is produced, but when the work or the product actually makes its
contribution to revenue. Only if no connection with revenue can be
established, cost may be charged as expenses to the current period (e.g.
office salaries and other administrative expenses). This principle allows
greater evaluation of actual profitability and performance (shows how much
was spent to earn revenue.

Concept of Matching Principle
In order to reach accurate net income figure, the expenses incurred to earn
the revenues recognized during the accounting period should be recognized
in that time period and not in the next or previous. This is called matching
principle of accounting.
Examples
1. Rs.2,000,000 worth of sales are made in 2010. Total purchases
of inventory were Rs.1,000,000 of which Rs.100,000 remained on hand at
the end of 2010. The cost of earnings is Rs.2,000,000 revenue is
Rs.900,000 [1,000,000 - 100,000] and this should be recognized in 2010
thereby yielding a gross profit of Rs.1,100,000.
2. A hospital pays Rs.20,000 per month to 5 of its doctors. Monthly sales are
Rs.500,000. Rs.100,000 worth of monthly salaries should be matched
with Rs.500,000 of revenue generated.
3. Depreciation and Cost of Goods Sold are good examples

Matching principle is relevant to the time period assumption, the revenue
recognition principle and it is at the heart of accrual basis of accounting.