What does the matching principle in accounting state?

The matching principle in accounting states that expenses should be matched to revenues in the period in which they are incurred. This principle is fundamental to accrual accounting, which aims to recognize economic events in the financial statements when they occur, regardless of when cash transactions happen.

By aligning expenses with the revenues they help generate, this principle ensures that the financial statements reflect a more accurate view of a company's performance over a specific period. For instance, if a business incurs costs to produce goods in one accounting period but sells those goods in the following period, the matching principle requires that the costs be recognized in the same period when the revenues from those sales are recorded. This correlation provides users of financial statements with a clearer understanding of profitability and operating efficiency.

Other options focus on different aspects of accounting. Recognizing revenues when cash is received is related to cash basis accounting rather than the matching principle, while recording assets at market value and recognizing expenses when cash is paid pertain to other accounting approaches that do not focus on matching expenses to revenues in the same timeframe.