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The timing of cash receipts and payments may not be the same as the sales and purchases recorded in financial statements. At the end of an accounting period, a business should make sure that everything has been accounted for, when it should be accounted for.

 The importance of timing. Imagine you are shopping in January and make all your purchases using a credit card. Although, you’ve effectively ‘spent’ money (or ‘incurred’ expenditure) in January, you won’t actually pay any cash until you pay your credit card bill, perhaps during February. Therefore, the cash cost of the shopping in January is zero.

case study Aaron, a salesperson, would argue that he has made a sale when his customer has placed an order. Helena, a lawyer, would argue that she has made a sale when her client signs a contract. Others may argue it’s when goods are delivered, a service is performed, or a customer has paid. However, using the matching concept, Brian, the accountant who works for Aaron, Helena and other businesses, only recognizes a sale when it has been ‘earned’. Similarly, Brian recognizes a purchase made by Aaron and Helena only when their suppliers have ‘earned’ the revenue, not when an order is placed, a contract signed, goods received, or a payment made. Revenue and expense recognition is a complex area for Brian.

Now using a business example – imagine a credit sale made in March, where the customer pays in cash during April. Although the business has effectively ‘earned’ a sale in March, the cash receipts from that customer during March are zero.

These examples highlight the importance of timing in accounting. Expenses can be incurred at different times to the associated cash paid. Likewise, income can be earned at different times to the associated cash received.

 The matching (or accruals) concept. Financial statements ‘match’ income and expenses to the periods in which they are earned and incurred to show a true and fair view to the users of those statements. This concept is a fundamental accounting concept used by the majority of businesses.

 The benefits. Matching income and expenditure to the periods in which they are earned and incurred enables more accurate and realistic performance measurement. Ultimately this leads to more efficient business management. The timing of cash receipts and payments is still important and businesses will monitor this separately.

Costs are accounted for when incurred and income when earned, as opposed to when cash is received or paid.