Learn about the relationship between accounting period assumption and matching principle.

1. Accounting period assumption and matching principle

The matching principle and the accounting (time) period assumption are both income measurement assumptions. In other words, they are used to measure business net income and other performance indicators. Both of these principles/assumptions affect the reported amount of revenues and expenses.

The accounting period assumption allows for the division of businesses operational activities into artificial time periods for reporting purposes as determined by the business owners. This assumption allows assigning revenues and expenses to a specific accounting period. An accounting period can be of any length. For comparison purposes, financial statements are usually prepared for an accounting period of the same length.  A 12-month accounting period is called a fiscal year, while an accounting period of less than 12 months is called an interim period.

The accounting period assumption is quite simple. Nevertheless, not all transactions can be easily assigned to a specific accounting period. Some transactions require an estimate as well as the assumption for periodicity, which allows for a systematic allocation of expenses or revenues. For example, a depreciation expense for a given period depends on the estimate for the number of years the fixed asset will be in use.

According to the matching principle, an expense of doing business is recorded in the same period as the revenue that has been generated as the result of incurring that expense. When revenues and expenses are not directly connected, they can be allocated among accounting periods in a systematic way (for example: depreciation expense, amortization expense, interest revenue from an investment).

As we can see, the matching principle depends on the accounting period assumption. The allocation of expenses and revenues to a specific accounting period requires an assumption about the length of the accounting period. Important to note, both the matching principle and the accounting period assumption are related to the going concern assumption, another income measurement assumption.

According to the going concern (continuity) assumption, financial activities of a business are assumed to be in operation for an indefinite period of time.  This assumption allows for a systematic allocation of certain revenues and expenses. As allocating revenues and expenses to a specific accounting period requires choosing the number of accounting periods, the matching principle, the accounting period assumption, and the going-concern assumptions are related.

All in all, there are three income measurement assumptions: the going-concern assumption, accounting period assumption, and matching principle.

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