Which accounting principle requires expenses to be matched with the revenue they generate?

The principle that requires expenses to be matched with the revenue they generate is the accrual basis accounting. This principle is foundational in accounting as it emphasizes the importance of recognizing revenues and their related expenses within the same accounting period. By doing so, it provides a more accurate representation of a company's financial performance, as it aligns the recognition of expenses with the income they helped to produce.

Accrual basis accounting ensures that financial statements reflect the true economic activities of a business rather than just the cash transactions. For example, if a company incurs costs to produce goods that are sold in the same period, those costs (expenses) are recorded in the same period as the revenue from those sales, allowing for a clearer picture of profitability.

In contrast, cash basis accounting records revenues and expenses only when cash is exchanged, leading to potential mismatches between income and associated expenses. Modified cash basis accounting combines elements of both cash and accrual methods, but it does not fully embrace the matching principle as accrual accounting does. Fund accounting is primarily used by non-profit organizations and government entities to track resources allocated for specific purposes, rather than focusing on the matching of revenues and expenses.