Which concept requires revenue earned and expenses incurred to earn that revenue to be reported in the same fiscal period?

Which concept requires revenue earned and expenses incurred to earn that revenue to be reported in the same fiscal period?

• A. Financial Ratios
• B. Temporary accounts
• C. Matching Expenses with Revenue
• D. Permanent accounts

Answer: (C)

The matching principle in accrual accounting requires that revenue earned and the expenses incurred to earn that revenue be reported in the same fiscal period. This alignment ensures that net income reflects the real economic activity of that period, not the timing of cash receipts or payments. For example, if a service is performed in December and billed later, the revenue is recorded in December along with the expenses incurred to earn that revenue (such as wages or supplies used in December), even if cash is paid or received in a different month. This principle contrasts with simply recognizing items when cash changes hands, which would distort profitability for the period. Financial ratios, permanent accounts, and temporary accounts relate to measurement methods or account structure, not the timing rule that ties revenue to its related expenses.

The matching principle in accrual accounting requires that revenue earned and the expenses incurred to earn that revenue be reported in the same fiscal period. This alignment ensures that net income reflects the real economic activity of that period, not the timing of cash receipts or payments. For example, if a service is performed in December and billed later, the revenue is recorded in December along with the expenses incurred to earn that revenue (such as wages or supplies used in December), even if cash is paid or received in a different month. This principle contrasts with simply recognizing items when cash changes hands, which would distort profitability for the period. Financial ratios, permanent accounts, and temporary accounts relate to measurement methods or account structure, not the timing rule that ties revenue to its related expenses.