Question

7.The matching principle requires that: A. revenues earned and expenses incurred in generating those revenues should be reported in the same income statement. B. non-operating gains and losses should be netted against each other. C. a proportion of each dollar collected will be assumed to be a recovery of cost. D. assets will be matched to the liabilities incurred to purchase them.

Answer 1

Answer:

A. revenues earned and expenses incurred in generating those revenues should be reported in the same income statement.

Explanation:

A matching principle is an accounting concept which is typically used on accrual basis accounts and it states that expenses incurred by an individual or business entity should be recognized and matched in the same period with respect to the revenues they are related to.

The matching principle indicates when costs are recognized as expenses on the income statement.

For instance, company XYZ purchases a property worth $90,000 in June, it was then sold in July for $250,000. Based on the matching principle, the $90,000 cost shouldn't be recognized by company XYZ as an expense until July, when the related revenue would be recognized also. Else, if recognized, its expenses would be overstated by $90,000 in June, and consequently understated to the tune of $250,000 in July.

Hence, matching principle requires that revenues earned and expenses incurred in generating those revenues should be reported in the same income statement.

Additionally, the matching principle helps business owners to calculate their taxes and profits or losses properly.