Is depreciation based on the matching principle or the realization principle?

The correct choice is the matching principle. This principle is fundamental in accounting as it holds that expenses should be recorded in the same period as the revenues they help to generate. Depreciation embodies this principle by allocating the cost of a tangible asset over its useful life, allowing businesses to match the cost of the asset with the income it produces during each accounting period. This approach provides a more accurate reflection of a company's profitability and financial position, as it ensures that the expense associated with the asset is recognized in the same periods when the asset is contributing to revenue.

The realization principle primarily concerns revenue recognition, focusing on the timing of when revenues are considered realized and can be recognized in the financial statements. It does not directly address the allocation of asset costs over time like depreciation does.

While there may be some conceptual overlap between the two principles, especially in complex scenarios, depreciation is specifically aligned with the matching principle as it connects asset costs to the revenues those assets generate over their useful lives.