This concept is to ensure that, in calculating profit, the expenditure incurred in earning it must be matched to it. For example, if a business bought 20 buckets but only sold 18 of them, it would be wrong to charge the profit and loss account with the cost of all 20 buckets, as there are still 2 in stock. If you were to ignore this concept, then your reported profit would be lower that it really was.
