Just in the past hour I was driving to the gas station 4 minutes from my house going 20-30MPH the whole way. Almost to the gas station my car goes over a pot hole and right after the car starts accelerating or rather revving on its own not much but enough to go from 20 to 40 on its own and the check engine light came on. I pull into the gas station and break hard and put it into park it revs to about 7 and I cut the engine. With the engine off the temp gauge goes up to high and stays that way for a couple minutes with the fans going waiting for it to stop overheating the fans stop and the needle jumps to cold. I try starting it but it wont start at all just cranks thats when I notice the temp is back at high, it goes to low again and thats when I can start it, I drive it home keeping it under 2 RPM but it revs on its own still and being 80F outside the temp gauge is at 0 or cold. Now it seems it actually overheated because the engine was hot not extremely but more than it should be going 20MPH for 5 minutes and its been an hour now and its still kinda hot. I read the code and it said something like "Temperature Sensor Circuit High".

So is it my temperature sensor, or is something more?

 

Could be a dislodged wire connection or even a vacuum hose especially as it started immediately after you drove over a pothole. That could have shaken something loose.
Don't keep driving it around though if its overheating or the engine will soon be cooked.

 

The temperature sensor wiring would be a good start point.
Maybe the IAT sensor also and throttle setup.

 

Forgot to mention I had my android hooked up via a bluetooth OBD 2 and my phone said the coolant temperature was 64ºC about 1 minute after turning off my car. I found that my temperature sensor wires were stripped and touching. The engine was hot but I was able to keep my hand on it.

 

My V40 runs about 78 -81 degrees C and the radiator fan will cut in if it goes over 100 degrees C.
In slow traffic it obviously climbs higher than 81 of course.
My temperature gauge is always at the midpoint even when the fan starts up but I also get specific readings from an Ultra Gauge that I have permanently plugged into the OBDII port.

At 64 degrees C the motor is still below normal hot running temperature.

 

Good to know, I got back from NAPA and got a new thermostat and temperature sensor and some 50/50 coolant. The sensor will be in tomorrow but I just installed the thermostat so tomorrow ill see if all this makes my car not act like its possessed.

 

I was looking at my timing belt does it look in need of replacement?

 

Do you have any idea of when the belt was last replaced? a good general rule is 7 years or 70K miles (whichever comes first). A second rule is if you don't know and it doesn't show signs of any recent work, replace it! Investing a few $100 now lets you forget about any problems for a while and its insurance against a failed belt which translates to a valve job in the $1500-2000 range (S40s are "interference engines" meaning the piston motion overlaps in space with the valves - so any mis-timing from a belt failure and you slap the pistons into the valves.

 

No idea, got it used 161K miles on the car. I am going to replace it next month when I have more money just hoping the belt won't break till then.

 

From those pics I think you definately need to attend to the cam belt etc asap.
The cracks are clearly visible.
I would not be working the engine hard at all prior to you getting onto replacing.