What is the matching principle in expense recognition?

• A. Expenses should be recognized in the same period as the revenues they helped generate.
• B. Expenses recognized when cash is paid.
• C. Revenues recognized before they are earned.
• D. Net income is the same as cash flow.

Answer: (A)

The matching principle is about aligning expenses with the revenues they help generate in the same accounting period. Under accrual accounting, costs are recognized when the related benefit is consumed, not when cash changes hands, so profit for the period reflects the actual economic activities. For example, the cost of goods sold is recorded when a sale occurs, depreciation is spread over the asset’s useful life, and prepaid expenses are expensed as the benefits are used. This contrasts with recognizing expenses only when cash is paid (cash-basis accounting) or recognizing revenues before they are earned, and it explains why net income is not the same as cash flow.