What does the expenses recognition principle state?

The expenses recognition principle, often referred to as the matching principle, states that expenses should be matched with the revenues they help to generate within the same accounting period. This principle is fundamental in accrual accounting, as it ensures that financial statements reflect the true economic performance of a business over a specific time frame.

When expenses are recognized in the same period as the revenues they are associated with, it allows for a more accurate evaluation of a company's profitability. For instance, if a company incurs costs to produce goods that it will sell during a certain period, those costs should be recorded as expenses in the same period the revenues from the sales are recognized. This matching provides a clearer picture of both income and expenses in relation to one another, leading to improved decision-making based on the company's financial health.

In contrast, the other options suggest approaches to expense recognition that do not align with the fundamental accrual accounting practice. For example, deferring expenses might lead to mismatched reporting periods, and recording expenses solely based on cash outflow misses the underlying economic events. Recognizing expenses in a following period would undermine the coherence of financial reporting by separating related revenues and expenses, reducing the relevance of the financial statements.