When are expenses recognized under the matching principle?

Under the matching principle, expenses are recognized when the revenue to which they relate is earned. This principle is fundamental to accrual accounting, which seeks to match income earned in a period with the expenses incurred to generate that income, regardless of when cash transactions occur.

For example, if a company provides a service in December but does not receive payment until January, the expense associated with that service should be recorded in December, the month when the revenue is earned. This approach ensures that financial statements accurately reflect the financial performance of a business during a specific period, providing more relevant information to stakeholders.

Other options, such as recognizing expenses when cash is paid out, only reflect cash basis accounting and do not align with the accrual basis that the matching principle embodies. Recognizing expenses when a service or benefit is received or when the fiscal year ends does not accurately consider the relationship between revenue and the expenses tied to generating that revenue, thereby failing to uphold the purpose of matching principle.