The Matching Principle

Get ready folks. This is the accounting-related post you’ve all been waiting for. If you do something all day long, eventually it relates to everything else.

In accounting, the matching principle says:

Expenses should be recorded during the period in which they are incurred, regardless of when the transfer of cash occurs.

Let’s take a few examples (and stretch them a bit):

  1. You get a legitimate bill in your inbox. According to the matching principle, you need to book that expense in your financials at the moment the service or good you bought was received, not when you finally pay it, perhaps weeks later. That money is spent, even though you are still holding it.
  2. Someone promises you money in writing, unconditionally, in writing. Boom! You show that promise as an asset as of the moment of their promise.
  3. You pay forĀ 12 months worth of services today, in March. Well, you don’t show that entire 12 month bill as an expense in March despite the fact that the cash went out in March. You expense it out evenly over 12 months as a “prepaid expense.”

It’s a nice concept to bring over to other things: your time, your energy, your own resources. If it’s going to happen, then it *did* happen. Book it and move on. If you don’t like it, don’t try to change the fact of it happening. Rather, try to build up the other side of the equation so that it doesn’t matter as much.

You can’t erase it. (In accounting, that would be fraud.) It happened. Make peace, but act to reduce its significance.

Now flip all this on its head. If you know something is coming or is due, and you don’t realize it (book it mentally), you’re lying. It could be to yourself or to your shareholders (family, friends, colleagues), but you are definitely lying.

Match your knowledge with your actions.