The matching principle is based on which relationship?

The matching principle is fundamentally anchored in the cause and effect relationship. This accounting principle dictates that expenses should be recognized in the same period as the revenues they help generate. The rationale behind this is that to accurately reflect a company's financial performance, all costs incurred in the process of generating revenue should be matched with the recognized revenue of that period. This ensures that financial statements provide a clear and accurate picture of a company's profitability.

For instance, if a company sells a product in January, the associated costs for producing or purchasing that product should also be recorded in January. This alignment of expenses and revenues clarifies the direct cause (expenses incurred) of the effect (revenue earned), making it easier for stakeholders to assess the financial health and operational efficiency of the business during that specific period.