This concept is based on the accounting period concept. It is widely accepted that the desire of making a profit is the most important motivation to keep the proprietors engaged in business activities. Hence, a major share of the attention of the accountant is being devoted to evolving appropriate techniques for measuring profits. One such technique is periodic matching of costs and revenues.
In order to ascertain the profits made by the business during a period, the accountant should match the revenues of the period with the costs of that period. By ‘matching’ we mean an appropriate association of related revenues and expenses pertaining to a particular accounting period. To put it in other words, profits made by a business in a particular accounting period can be ascertained only when the revenues earned during that period are compared with the expenses incurred for earning that revenue. The question as to when the payment was actually received or made is irrelevant. For e.g. In a business enterprise which adopts calendar year as accounting year, if rent for December 1989 was paid in January 1990, the rent so paid should be taken as the expenditure of the year 1989, revenues of that year should be matched with the costs incurred for earning that revenue including the rent for December 1989, though paid in January 1990. It is on account of this concept that adjustments are made for outstanding expenses, accrued incomes, prepaid expenses, etc. While preparing financial statements at the end of the accounting period.
The system of accounting which follows this concept is called a mercantile system. In contrast to this, there is another system of accounting called as cash system of accounting where entries are made only when cash is received or paid, no entry is made when a payment or receipt is merely due.