Accounting Fundamentals Certification (AFC) Practice Test 2025 - Free Accounting Practice Questions and Study Guide

Question: 1 / 400

Which accounting principle dictates that expenses should be recorded when incurred, not necessarily when paid?

Revenue Recognition Principle

Matching Principle

The principle that expenses should be recorded when incurred, rather than when paid, is known as the Matching Principle. This principle is crucial in accrual accounting, which aligns expenses with the revenues they help generate within the same accounting period. By doing so, it provides a clearer picture of a company’s financial performance, ensuring that the expenses related to any revenue generate are recognized in the same time frame. For example, if a business incurs costs to produce goods in one period and sells those goods in a subsequent period, the Matching Principle requires that both the expenses and revenues be recorded in the period the sales occur.

This approach enhances the accuracy of financial statements by reflecting the true financial position of the business at any given time, aligning costs with related revenues to avoid misrepresentation of profit or loss in a given period.

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Historical Cost Principle

Economic Entity Assumption

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