SingaporeAccountingSyllabus dot point

Why must income and the expenses that earned it be recognised in the same period, regardless of when cash moves?

Explain the matching principle and the accrual basis, and why year-end adjustments are needed

A focused answer to the O-Level Principles of Accounts outcome on matching. The accrual basis versus cash basis, matching expenses to the income they help earn, and why adjustments are made at the year end.

Generated by Claude Opus 4.87 min answerUpdated 2026-06-06

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this dot point is asking
The answer
Examples in context
Try this

What this dot point is asking

SEAB wants you to explain the matching principle and the accrual basis, and why year-end adjustments are needed. The central insight is that profit is measured by matching the income of a period against the expenses that helped earn it, regardless of when cash actually moves. Because cash and earning rarely line up exactly, adjustments are made at the year end to put each in its proper period.

The answer

The accrual basis versus the cash basis

Basis	Income recognised when	Expense recognised when
Cash basis	Cash is received	Cash is paid
Accrual basis	It is earned	It is incurred

Accounting uses the accrual basis. A credit sale is income when the goods are sold, even though the customer pays later; an electricity bill is an expense in the period the power was used, even if paid next month.

The matching principle

The matching principle says the expenses of a period should be matched against the income they helped to earn in the same period. So the cost of the goods sold is set against the sales they produced, and rent for the year is charged in that year, no matter when it was paid.

Matching is what makes profit meaningful: it compares what the business earned with the true cost of earning it.

Why year-end adjustments are needed

Cash payments and receipts rarely fall exactly within one financial year, so at the year end we adjust:

Accrued expenses - incurred but not yet paid (add to expenses).
Prepaid expenses - paid in advance for next year (remove from this year's expenses).
Accrued income - earned but not yet received (add to income).
Prepaid income - received in advance (remove from this year's income).
Depreciation - spreading the cost of a non-current asset over its useful life.
Irrecoverable debts and allowances - recognising debts unlikely to be collected.

Each adjustment moves an amount into, or out of, the current period so that income and expenses match.

Worked example

A business with a 31 December year end has: sales for the year $\$ 50,000 $; cost of those goods$ \ $30\,000$ ; rent of $\$ 6,000 $paid for the 12 months to 31 March next year (so 3 months fall in next year); an electricity bill of$ \ $400$ for December that is unpaid at the year end. Show how matching gives this year's expenses.

Step 1: Match the cost of sales

The $\$ 30,000 $cost of the goods sold is matched against the$ \ $50\,000$ sales, giving gross profit of $\$ 20,000$. The cost relates directly to this year's income.

Step 2: Adjust the rent (prepayment)

The $\$ 6,000 $covers 12 months, but 3 months (January to March) are next year. This year's rent$ = 6,000 \times \dfrac{9}{12} = \ $4\,500$ . The other $\$ 1,500$ is a prepayment carried forward.

Step 3: Adjust the electricity (accrual)

The December power was used this year but is unpaid. The $\$ 400 $is **accrued** and added to this year's expenses, with a$ \ $400$ current liability.

Step 4: State the matched expenses

This year's expenses include cost of sales $\$ 30,000 $, rent$ \ $4\,500$ and electricity $\$ 400$. Each is matched to the period it relates to, regardless of the cash timing, which is exactly what the matching principle requires.

Examples in context

Example 1. A magazine subscription received early. A publisher receives $\$ 1,200 $in December for a 12-month subscription starting in December. Only one month is earned this year ($ \ $100$ ); the other $\$ 1,100$ is income received in advance, a liability carried forward. Matching recognises income as it is earned, month by month, not all at once when the cash arrives.

Example 2. Wages owed at year end. A firm owes three days of wages, $\$ 900 $, at 31 December but pays them in January. The matching principle charges the$ \ $900$ to this year, because the work was done this year, and shows it as an accrued liability. Without the adjustment, this year's profit would be overstated and next year's understated.

Try this

Q1. State which basis of accounting the matching principle requires. [1 mark]

Cue. The accrual basis (income recognised when earned, expenses when incurred).

Q2. Rent of $\$ 2,400$ is paid for 12 months, of which 4 months fall in the next financial year. State this year's rent expense. [2 marks]

Cue. This year $= 2\,400 \times \dfrac{8}{12} = \$ 1,600 $; the remaining$ \ $800$ is a prepayment.

Q3. Explain why an unpaid electricity bill is still charged as an expense this year. [2 marks]

Cue. Under matching, the expense belongs to the period the power was used; it is accrued and charged now even though it is paid later.

Exam-style practice questions

Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Original5 marksA business pays rent of

\

1\,200$ in December for the three months December to February. Its financial year ends on 31 December. (a) Applying the matching principle, how much rent is an expense this year? (b) Explain your answer.

Show worked answer →

(a) Only one month (December) falls in this financial year. Rent expense this year $= 1\,200 \div 3 = \$ 400$.

(b) The matching principle says an expense belongs to the period in which it helps earn income, not the period it is paid. The $\$ 1,200 $covers December, January and February; two of those months (January and February) are next year. So$ \ $400$ is this year's expense and $\$ 800$ is a prepayment (a current asset) carried forward to next year.

Markers reward $\$ 400 $as this year's expense, identifying the$ \ $800$ as a prepayment carried forward, and explaining that the expense is matched to the period it relates to, not when it is paid.

Original4 marksExplain the difference between the cash basis and the accrual basis of accounting, and state which one the matching principle requires.

Show worked answer →

Under the cash basis, income and expenses are recorded only when cash is received or paid. Under the accrual basis, income is recognised when it is earned and expenses when they are incurred, regardless of when the cash moves.

The matching principle requires the accrual basis: it matches the expenses of a period to the income they helped earn in that same period. For example, goods sold on credit are recognised as income when sold, not when the customer later pays, and the cost of those goods is matched against that sale.

Markers reward the contrast (cash basis records on cash movement; accrual basis on earning/incurring) and stating that matching requires the accrual basis.