Failure to record corresponding revenues and expenses in the same accounting period will result in an understatement of net income in the period when the revenue is recorded and an overstatement of net income in the period in which the corresponding expenses are recorded.

• A. True
• B. False
• C. Not enough information
• D. Depends on the entity

Answer: (B)

Accrual accounting relies on the matching principle: revenues and the expenses that generate them should be recorded in the same period. If you record the revenue but do not record the related expense in that period, net income is overstated in the period of the revenue because income appears without its corresponding cost. When you later recognize the expense in a subsequent period, net income in that later period becomes understated because that cost now reduces profit there. So the typical effect is an overstatement in the period the revenue is recorded and an understatement in the period the expense is recorded, not the other way around. For example, selling goods for 200 with a cost of 100 recorded later means period 1 shows net income too high by 100, and period 2 shows net income too low by 100. Therefore the statement is false.