Question

________ principles require that revenues which are recognized through the application of the realization principle are then related to relevant and appropriate historical cost.

• A. Accounting period
• B. Cost concept
• C. Matching
• D. Realization

Answer 1

The correct option is C Matching

The process of ascertaining the amount of profit earned or the losses incurred during a particular period involves deduction of related expenses from the revenue earned during that period. The matching concept emphasises exactly on this aspect. It states that expense incurred in an accounting period should be matched with revenues during that period. It follows from this that the revenue and expenses incurred to earn these revenues must belong to the same accounting period. Revenue is recognised when a sale is complete or service is rendered rather when a=cash is received. Similarly, an expense is recognised not when cash is paid but when an asset or service has been used to generate revenue. The matching concept, thus, implies that all revenues earned during an accounting year, whether received during that year, or not and all costs incurred, whether paid during that year, or not should be taken into account while ascertaining profit or loss for that year.