To match or not to match?

This paper analyses the income smoothing effect of the matching principle in accounting. Income smoothing, under Gibbins and Willett [Gibbins, M., Willett, R., 1997. New light on accrual, aggregation and allocation, using an axiomatic analysis of accounting numbers' fundamental and statistical character. Abacus 33(2), 137-167], is the variance reduction of periodic accounting earnings to make these closer to the long-term profit per period. A conjecture made in Gibbins and Willett was that the accountant's technique of matching revenues and expenses will always smooth accounting earnings. This paper examines this conjecture and shows that, on average, matching smooths earnings if the firm is in profit, but does not always smooth earnings when the firm is making a loss. It seems that the accountant's 'conservative' practice of recognising losses when these are foreseeable, rather than when just realised, is consistent with profit smoothing. The paper concludes that matching and conservatism are not merely ad hoc or traditional rules, which accountants arbitrarily apply, but have a rational basis in the sense that they can allow better estimation of the long-term profitability of the firm.