Matching Principle
When a business performs a consulting service for $400, it earns $400 in revenue. It does not have $400 of income because when it performs the service, it also incurs some expenses.
When the same event has both a revenue element and an expense element, both elements must be reported in the same accounting period. The expense must be matched with the revenue. For example, if the entity performs consulting services for $400 and the only expense in providing the service is $100 in salaries, the two entries are:
For the revenue element
|
Dr. Cash |
400 |
|
|
Cr. Revenue - Consulting |
400 |
For the expense element
|
Dr. Salaries and Wages |
100 |
|
|
Cr. Cash |
100 |
Note that in the typical case there would be other expenses in providing consulting services in addition to salaries. These other expenses need to be deducted from revenue to obtain the profit from the transactions.