This is also called 'Matching of Costs against Revenues Concept'. To work out profit or loss of an accounting year, it is necessary to bring together all revenues and costs pertaining to that accounting year. In other words, expenses incurred in an accounting year should be matched with the revenues earned during that year. The crux of the problem, therefore, is that appropriate costs must be matched against appropriate revenues.

For this purpose, first we have to recognize the inflows (revenues) during an accounting period and the costs incurred in securing those inflows. Then, the sum of the costs should be deducted from the sum of the revenues to arrive at the net result of that period. 

The Matching Concept thus has the following implications for the ascertainment of profit or loss during a particular period.

i.The costs should relate to the same accounting period as the revenues. For example, when we prepare the Profit and Loss account for 1986, we shall take into account all those incomes that were earned during 1986, and similarly consider only those costs which were incurred in 1986. Any costs or incomes which relate to 1985 or 1987 shall be excluded.

ii.All costs included during the accounting period (whether paid or not) and revenues earned during. For the one year ( whether received or not) are fully taken into account.

iii.Only those cost relate to the revenue taken into account. This is the reason why we consider only the cost of goods sold, and not the cost of goods produced during that period.