ACCA Financial Reporting (F7) Practice Exam 2025 – Complete Prep Guide

The matching principle is a fundamental concept in accounting that states expenses should be recognized in the same period as the revenues they help generate. This ensures that the financial statements present an accurate picture of a company's financial performance during a specific accounting period.

When revenues are earned, the corresponding expenses necessary to earn those revenues should also be recorded in that same period, regardless of when cash transactions occur. This matching of revenues with the associated expenses allows for a more accurate representation of profitability, reflecting the true financial outcomes of business activities.

For instance, if a company sells a product in March and incurs associated costs in that same month, both the revenue from the sale and the costs associated with producing or selling that product will be recorded in March. This aligns with the matching principle, allowing stakeholders to understand how much profit was actually earned from specific sales activities in that period.

Other choices focus on cash transactions and year-end recognition, which do not align with the core essence of the matching principle since they disregard the timing of expenses in relation to revenues.