What is the difference between the matching principle and the revenue recognition principle?

• A. Matching aligns revenues with all expected future costs; revenue recognition defers revenue until cash is received.
• B. Matching recognizes revenue when cash is received; revenue recognition matches expenses to that cash receipt.
• C. Matching matches expenses with related revenues in the period earned; revenue recognition determines when revenue is recognized.
• D. Matching matches revenues with all expected future costs; revenue recognition determines when revenue is recognized.

Answer: (C)

The essential idea is that expenses are recorded in the same period as the revenues they help generate, while revenue is recognized when the earnings process is complete and the revenue is earned, regardless of when cash is received. The matching principle pairs related expenses with the revenues they generate in the same period, giving a true picture of profitability. The revenue recognition principle determines the timing of when revenue is recognized, based on when the goods or services are delivered and the earnings process is complete.

For example, if a service is performed in December but cash is collected in January, the matching principle would record the related expenses in December with the December revenue, while the revenue recognition principle would recognize the December revenue even if cash comes later.

The correct statement captures this distinction: matching relates expenses to the revenues they help generate in the period earned, and revenue recognition decides when revenue is recognized. Other options mix up cash timing with revenue timing or incorrectly pair revenues with future costs, which does not reflect how these principles actually work.