Matching Principle

Under accrual accounting, revenue is recognized when earned and expenses are recognized when incurred to generate that revenue — the two must be 'matched' in the same period. The goal is a faithful picture of profitability: if you earned $100 of revenue this quarter, the costs that produced that $100 belong in this quarter too, even if you paid for them last quarter or will pay next quarter. Without matching, profit would swing wildly with cash timing and tell investors nothing useful about operating performance.

Cost of goods sold: inventory cost sits on the balance sheet as an asset and only becomes an expense (COGS) when the product is sold and revenue is recognized. Depreciation: a long-lived asset that helps generate revenue for years is expensed gradually over its useful life rather than all at once — matching its cost to the periods it produces revenue. Accruals and prepaids: salaries earned but unpaid are accrued as expenses now (matched to this period's output); rent paid in advance is recorded as a prepaid asset and expensed over the months it covers.

Cash accounting records expenses when cash is paid — simple but distorting. The matching principle is the conceptual reason accrual accounting exists and why net income differs from cash flow. This gap is exactly why the cash flow statement is needed: it reconciles accrual-based net income back to actual cash. In interviews, the matching principle is the underlying 'why' behind questions about depreciation, working capital, and the difference between profit and cash.