Can you explain the matching concept?

The matching concept, otherwise known as the 'accruals' concept, is a fundamental accounting principle that provides that income and expenditure in a business should be matched to the period to which they were incurred.

For example, commonly in businesses, sales are made on credit (meaning that a customer has received the item and is due to pay for it at a later date).

​Lets say that a business has sold a car on credit for £1,000 on 12th December 2016, and payment is to be received 12th January 2017.

The company's year end is 31st December 2016, therefore they will be completing their accounts for the period 1st January 2016 - 31st December 2016.

Although money has not yet been received before 31st December 2016, the accounting books should show that the sale has been made in that period.

If the sale was recorded in the next accounting period (when money for the car was received) sales for the year ending 2016 would be understated by £1,000, therefore profits would also be understated by £1,000 - not presenting a true and fair view of the financial position of the business.

Additionally, the same rule is applied when a customer pays for something in advance.

Using the same example, lets say a customer paid £1,000 for the car on 12th December 2016, however, was not due to recieve the car until 12th January 2017 (when the acutal sale will have occurred), the sale should be recorded for the following period - 1st January 2017 - 31st December 2017.

If the sale was recorded in the previous period (when cash was recieved) then sales, and therefore profits, in that period will be overstated by £1,000 - not presenting a true and fair view of the company's financial position.

Subsequently, such payments owed to the business (accruals) and/or payments made in advance to the business (prepayments) will be recorded in the books of the company, specifically in the balance sheet, to demonstrate such transactions.