Legal Definitions - matching principle

The matching principle is a method used in taxation to handle expense deductions. It involves matching the depreciation of an asset in a given year with the associated tax benefit.

For example, let's say a company purchases a machine for $10,000. The machine has a useful life of 5 years, so the company can deduct $2,000 per year in depreciation expenses. The matching principle ensures that the tax benefit of the $2,000 deduction is spread out over the 5-year useful life of the machine.

Another example is when a company pays for employee salaries. The matching principle ensures that the expense of paying the salaries is matched with the revenue generated by the employees' work during that same period.

The matching principle is important because it helps to accurately reflect a company's financial performance and ensures that expenses are properly accounted for in the correct period.