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Matching Principle

This principle demands that the revenue and the expenses incurred to earn revenue should be properly matched. This means the following:

  • All the expenses incurred in the current year, whether paid or payable (outstanding expenses), should be debited to Trading or Profit and Loss Account
  • If some expense has been incurred against a revenue which will be earned in the next year, the expense should not be debited to the current year’s Profit and Loss Account (prepaid expenses)
  • If an income is received in the current year but the work for which has to be done in the next year(income received in advance), the income is to be considered in the next year and should not be credited to Profit and Loss Account

Exception: There are some expenses which are debited to Profit and Loss Account, though they are not incurred for earning revenue.


Example: Loss of stock by fire, Bad debts, Cash defalcation etc. These are debited to Profit and Loss Account to ensure that Profit and Loss Account shows a true financial result.


Note: Opening stock of goods is debited to Trading account since the relevant sale is credited in the same account, as per matching concept.


Illustration 3


From the following information, prepare the Profit and Loss Account showing net profit of a sole trader for the year ending on 31st March, 2014




Note: Drawings and Income Tax (being personal expenses) are debited to Capital Account.

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