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Let’s start with an example to understand this concept.
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Here it is:
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Suppose I buy 10 Books for Rs 1,000.
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This means that 1 Book costed me.
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Now, if I sell 5 Books at Rs 150 each, I will get?
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Now, is it correct to say that the total amount that I spent (Cost) was Rs 1,000 and the total amount I earned (Revenue) is Rs 750, and hence I incurred a Loss of Rs 250?
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Absolutely Not.
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The logical thing would be to see, at what amount did I buy the Books which I sold.
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I sold 5 Books for ?
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I had bought those 5 Books for ?
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So, I made a profit of ?
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What we saw above is Matching Concept.
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This concept is very important for correct determination of net profit.
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According to this concept, in determining the net profit from business operations, all costs which are applicable to revenue of the period should be charged against that revenue, i.e. deducted from that revenue.
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Accordingly, for matching costs with revenue, first revenues should be recognised and then costs incurred for generating that revenue should be recognised.
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This concept is based on the Accounting Period Concept.
