As per matching concept, we have to match our all costs and all revenues for calculating the correct net profit. When we compare our total revenue with total expenses, we can find our net profit.
Net profit is the accounting information which needs different interested parties for taking the decision. For following on the matching concept, we calculate following items.
- Make the List of Expenses : First of all, we collect all the expenses information which are paid and which are payable. By making profit and loss account, we show it in the debit side.
- Calculate Cost of Goods Sold : For showing the cost of goods sold in the debit side of profit and loss account. We will add opening stock in current purchase and deduct closing stock from this.
- Make the List of Revenues : Second, we collect all the information of our total revenues which we have generated from our sales and providing our services. We will include both received and receivable revenues. We will show it in the credit side of profit and loss account.
- Match between Revenues and Expenses : Now, start to match both debit and credit side of profit and loss account. When you will compare both side, you will find that one side’s total will be less than other side. Difference may be net loss or net profit. If revenues are more than our expenses, excess of revenue over expenses will be net profit. If expenses are more than our revenues, excess of expenses over revenues will be net loss.