What is the matching principle?

• A. Expenses are recognized in the same period as the revenues they help generate.
• B. Expenses recognized when paid.
• C. Expenses recognized when they are incurred.
• D. Expenses recognized when the owner withdraws cash.

Answer: (A)

The main idea being tested is that expenses should be recorded in the same period as the revenues they help generate. This aligns the income for a period with the actual performance, not with when cash changes hands. For instance, the cost of goods sold is matched to the sale date, depreciation spreads the asset’s cost over the years it contributes to revenue, and salaries are recorded in the month employees contribute to output. If expenses were recognized only when cash is paid, profits could reflect cash timing rather than real economic activity. If expenses were recorded only when incurred, some costs might not align with the related revenue. Withdrawals by the owner are distributions, not business expenses, so they don’t affect the period’s income in the same way.