Lesson 1

Accounting Principle 10: Matching

Income earned during an accounting period has to be matched with the expenses incurred in order to obtain a true and fair value of profit or loss for that accounting period.

Income Statement (or Statement of Financial Performance) is the financial report to deliver the results of Matching principle.

Accounting Principle 11: Revenue Recognition

Revenue recognition is a generally accepted accounting principle (GAAP) that stipulates how and when revenue is to be recognized.

Generally, revenue is earned when goods have been delivered or services have been provided.

For example, a sales transaction is deemed completed upon goods delivered and accepted by the customers, regardless of whether it was a cash or credit transaction.

Similarly, a tuition service income is deemed earned upon lessons delivered, regardless of how much fees have been received.

Accounting Principle 12: Prudence

Prudence concept is also known as the Conservatism concept. It states that profits and assets should not be overstated while losses and liabilities should not be understated.

A business must report and adjust for probable losses immediately, even though the losses may not be confirmed yet.

Profits, however, are only recorded when it is actually earned.

For example, any debt owed to the business by a debtor (trade receivable) who is insolvent, is deemed as a loss immediately, even if he has yet to be declared bankrupt.