LEGEND: It can overcomplicate finances for small

Dr - Debit businesses.
Cr - Credit ●​ Less useful for cash-based businesses.
Red-colored text - Applicable examples, but are
not yet part of the current lesson Example:
​
​ Enzo’s Clothing received office supplies worth
ACCRUAL PRINCIPLE 20,000 on January 10, 2025, and an invoice
-​ Recording a transaction in time it payable for 30 days.
occurs, not when the related cash is
-​ It must be recorded on the day it occurs
received or paid
(January 10), not in the time span of the
-​ Foundation of the accrual basis of
invoice payable (January 11 to February
accounting
9)
-​ Ensures financial statements show the
true performance of a period Journal Entry (January 10, Received supplies;
not yet used)
Examples of the proper usage of the accrual
principle: Dr. Office Supplies: 20,000

●​ Record revenue when earned, not when Cr. Accounts Payable: 20,000​
paid. ​
●​ Record expenses when incurred, not (Adjusting Entries)
when paid.
●​ Record bad debts when invoiced, not Let’s say that on January 31, Enzo’s Clothing
when confirmed uncollectible. used 10,000 worth of supplies. Hence, Enzo’s
●​ Spread asset costs over their useful life. clothing must adjust its journal entry to record
●​ Record commissions when earned, not the office supplies expense of January.
when paid.
●​ Record wages in the period worked, not Dr. Office supplies expense: 10,000
when paid
Cr. Office supplies: 10,000
Disadvantages:
The remaining 10,000 remains as an asset in the
●​ More complex than cash accounting and balance sheet of January.
requires adjusting entries
●​ Time-consuming to track revenues and By February 9, 2025, Enzo’s Clothing paid its
expenses when earned/incurred supplier for office supplies.
●​ Requires extra training to avoid errors
Dr. Accounts Payable: 20,000
●​ Involves estimates that can lead to
inaccurate statements
Cr. Cash: 20,000
●​ Can be manipulated to alter reported
results What if Enzo’s Clothing decided to pay prior to
●​ May differ greatly from actual cash the last day of the invoice?
flows, risking cash shortages​
ANSWER: Same process, simply record what Next: example of recording the revenue or asset
date the payment happened.
On August 8, 2025, JoaquinTech received an
CONSERVATISM PRINCIPLE email from Mr. Gene regarding the service of
website creation.
-​ Record expenses and liabilities as soon
as they occur, but only record revenues TAKE NOTE: In this case, there is no existing
and assets when they are certain transaction since JoaquinTech only received an
-​ Avoids overstating income or assets email for a potential client

Advantages of the Conservatism Principle On the following day (August 9), JoaquinTech
replied to Mr. Gene’s email and stated that the
1.​ Less risk of trouble – If your reports service for website creation would be 15,000
show lower profits and assets, it’s harder pesos
for people to accuse you of exaggerating
your financial performance. Still, there is no existing transaction, as it is only
2.​ Investor trust – Consistently cautious a simple conversation.
reporting makes investors more likely to
believe your financial statements and August 10, 2025, Mr. Gene sent an email to
invest in your business. JoaquinTech, stating that he agreed with the
price and wanted JoaquinTech to start
Impact on Reserves immediately.

-​ When making estimates, choose the By August 12, JoaquinTech finished the website.
safer (more cautious) number if there’s
uncertainty. For example, if bad debts IF MR. GENE PAID IMMEDIATELY. THIS
might be 2% or 5%, use 5% unless IS THE JOURNAL ENTRY:
there’s strong proof otherwise. Auditors
like this because it avoids overstating Dr. Cash: 15,000
income.
Cr. Revenue: 15,000
Example:
WHILE IN THE CASE OF AGREEMENT
JoaquinTech heard that its office had a water OF PAYING IN A SPECIFIC TIME (also an
leak on its ceiling last March 13, 2025. Out of example of accrual principle):
100 computers, 25 of them worth 375,000 were
Dr. Accounts Receivable: 15,000
completely destroyed.
Cr. Revenue: 15,000
The expense or loss must be recorded
immediately to prevent overstating the income or
asset.
CONSISTENCY PRINCIPLE
Dr. Loss on asset disposal: 375,000
-​ Once a company adopts an accounting
Cr. Office Equipment: 375,000 method or principle, it should continue
 using it every year unless there is a
valid, demonstrable reason to change
-​ Ensures comparability of financial COST PRINCIPLE
statements over time.
-​ Switching between different methods -​ When you buy something for your
without a clear reason business, you write it down in your
-​ Changes are permitted if there is a better books at the price you paid, not the price
method or a requirement by it’s worth now.
law/standards -​ However, it has limitations; in some
-​ Must disclose the reason and effect of industries asset values change a lot, such
the change in the financial statements as real estate, financial services, and
commodities
Advantages of the Consistency principle: -​ Modern accounting standards have
increasingly shifted toward fair value
1.​ Comparability - Since the same accounting, which reflects the current
accounting methods are applied from market value of assets and liabilities.
period to period, financial statements -​ Fair value accounting: update the value
can be compared over time. of assets on its current value.

This helps in identifying trends, growth Applicability of the Cost principle:

patterns, or declines that are useful for
decision-making. 1.​ Short-term assets and liabilities
-​ Highly applicable
2.​ Trust by Users - Investors, creditors, -​ Values don’t change much in the
and auditors gain more confidence in the short time before they are
financial reports because results are settled or liquidated
prepared consistently. 2.​ Securites
-​ Not applicable
This reduces doubt about whether -​ Accounting standards require
changes in numbers are due to real these to be reported at fair value
performance shifts or just changes in (market value), not historical
accounting methods. cost, since their values fluctuate
regularly
Example: -​ Examples: stocks, bonds,
investments
-​ Year 2024: LeiNaia Cosmetics uses the
3.​ Long-term assets and liabilities
straight-line depreciation method
-​ Less applicable
-​ Year 2025: Switches to the
-​ Historical cost may not reflect
double-declining method with no valid
true value over time.
reason
Adjustments like depreciation,
WHEN CAN A COMPANY CHANGE ITS amortization, or impairment
METHOD?: bring values closer to reality, but
upward revaluation is usually
1.​ Have a valid reason not allowed under the cost
2.​ New mandatory standard principle
 -​ buildings, equipment GOING CONCERN PRINCIPLE
-​
-​ Assumes that a business will continue
ECONOMIC ENTITY PRINCIPLE operating for the foreseeable future
-​ Not planning to close or liquidate assets
-​ A business is separate from its owner soon
(juridical person) -​ Accountants record assets and liabilities
-​ No mixing of personal and business as if the business will not stop operating
finances -​ Depreciation, amortization and deferrals
-​ Each business or branch keeps its own make sense only if the business will
separate accounting records continue
-​ Auditors can easily check the business -​ GAAP: No strict rules on exactly when
without confusion from unrelated to declare going concern issues.
transactions -​ Auditors should examine whether a
company can continue as a going
Example: concern and disclose existing doubts
Cheska owns a coffee shop and a funeral home. Example
She bought embalming equipment yesterday;
hence, it should be recorded on the funeral home Enzo, an instructor and owner of a review center
books only. for the Licensure exam for Criminologists, paid
60,000 for a 1-year rent.
FULL DISCLOSURE PRINCIPLE
With the going concern principle, the
-​ All significant information that can depreciation expense every month must be 5,000
affect users’ decisions must be disclosed
in the financial statements Without a going concern, the expense must be
-​ Provides transparency and prevents 60,000 immediately, because of the possibility
misleading financial reporting of closing soon
-​ May include quantifiable (numbers) and
non-quantifiable A common reason for questioning the going
-​ Only information that is significant concern principle is bankruptcy
needs to be disclosed
-​ Disclose Accounting policies MATCHING PRINCIPLE
-​ All problems or disputes must be
disclosed to the users of financial -​ Expenses should be recorded in the
statements (investors, creditors) same period as the revenues they helped
generate
Examples: -​ It prevents overstating profit in one
period
-​ Pending lawsuits (non-quantifiable) -​ Ensures fair financial statements
-​ Pending lawsuits with estimated cost
(quantifiable) Examples (from article):

For commissions:​
A salesman earns a 5% commission on sales
shipped and recorded in January. The Dr. Bonus expense: 50,000
commission of 5,000 is paid in February. You
should record the commission expense in Cr. Accounts payable: 50,000
January, so that the expense is recognized in the
same month as the associated sale When paid in the following month

​ Dr. Accounts payable: 50,000

January # 2025, (when the liability incurred)​
Cr. Cash: 50,000
Dr. Commission Expense: 5,000
For wages:
Cr. Commission payable: 5,000
The pay period for hourly employees ends on
February # 2025, (when the liability was paid)
March 28, but employees continue to earn wages
Dr. Commission payable: 5,000 through March 31, which are paid to them on
April 4. The employer should record an expense
Cr. Cash: 5,000 in March for those wages earned from March 29
to March 31.
For depreciation:
Journal entry for March 31:
A company acquires production equipment for
100,000 that has a projected useful life of 10 Dr. Wage Expense: ##,###
years. It should charge the cost of the equipment
to depreciation expense at the rate of $10,000 Cr. Wage Payable: ##,###
per year for ten years, so that the expense is
Journal entry for April 4:
recognized over the entirety of its useful life.​
​ Dr. Wage Payable: ##,###
Journal entry for the end of the year:
Cr. Cash: ##,###
Dr. Depreciation Expense: 10,000
TAKE NOTE: Wage is different from salary, and
Cr. Accumulated Depreciation: 10,000 in some charts of accounts—these two are
distinct accounts (e.g, Expense,
Do this for 10 years until the equipment is
Payable/Liability).
fully-depreciated
For the cost of good sold:
For employee bonuses:
A company sells 50 units of a product for
Under a bonus plan, an employee earns a
$5,000. The cost of the goods sold for these
$50,000 bonus based on measurable aspects of
units is $2,000. The company should recognize
her performance within a year. The bonus is paid
the entire $2,000 cost as expense in the same
in the following year. You should record the
reporting period as the sale, since the
bonus expense within the year when the
recognition of revenue and the cost of goods
employee earned it.
sold are tightly linked.
Journal Entry
Journal entries: -​ The Securities and Exchange
Commission has suggested for
Entry 1 presentation purposes that an item
representing at least 5% of total assets
Dr. Cash: 5,000 should be separately disclosed in the
balance sheet
Cr. Revenue: 5,000
-​ Material is subjective, for some
If invoiced: company it might be considered as
immaterial
Dr. Accounts receivable: 5,000 -​ However, even small amount can still be
considered material if: it affects the
Cr. Revenue: 5,000 profit, affects financial ratios

Entry 2 Example (aided by AI):

Dr. Cost of goods sold: 2,000 1.) You own a small business, For August here is
your initial income statement
Cr. Inventory: 2,000

Advantages:

-​ Ensures accurate profit/loss reporting by

matching revenues with related
expenses

Disadvantages:
You might think your business made a profit of
1,000. However, you forgot to include a 1,200
-​ It requires extra work as the business
electricity bill that arrived late
needs to record accruals—which means
tracking expenses and revenues even if
If you now include that expense:
no cash has been received or paid

When to use Matching principle?

It is best to use when the expense has a clear

revenue link

MATERIALITY PRINCIPLE
It resulted in a net loss.
-​ Small or insignificant amounts can be
ignored when applying accounting rules, 2.) You have a bank loan, and the bank says:
as long as they won’t mislead users of
the financial statements. “Your current ratio must be 1.5 or
-​ There is no exact peso that defines a higher to keep your loan.”
“material”, accountants use professional
judgement in the situation.
 the difference in valuation, Maestro still reports
the value of this property on its balance sheet at
the original purchase price, rather than what it
would fetch on the open market.

However, the business forgot a small Maestro also has a skilled group of programmers
3,000 payable to a supplier. that has developed a hit software app that can
produce original pop music hits on demand. The
Add the current liabilities and 3,000
app has generated over $1 billion in sales for the
= 103,000
company, and yet the programming skill of the
Now divide it again programmers cannot be quantified, so their value

150,000 divided by 103,000 = 1.456 to the company is not recorded on its balance
sheet at all.
Hence, the business violated the loan
agreement
RELIABILITY PRINCIPLE
MONETARY UNIT PRINCIPLE

-​ A business can only record -​ The concept of only recording those

business transactions that can be transactions in the accounting system
expressed in terms of currency
-​ Non-quantifiable items: that you can verify with objective
emotions, skills, motivational evidence
speeches, etc.
-​ Examples of objective evidence are
-​ The assumption that the money
itself is treated as unit of purchase receipts, cancelled checks,
measurement bank statements, and appraisal reports
-​ It ignores inflation effects
-​ Third-party documents = external
-​ Assumes that the value of money
stays stable over time -​ Recording reserves is difficult because
they are based on estimates and
Example:
opinions. To support reserves, provide a
Maestro Corporation acquired a corporate detailed analysis of why it is needed.
headquarters building in Silicon Valley in 1972 Use verifiable historical data from
for $350,000 and has held onto the property ever similar past transactions to justify the
since. It is now valued at $20 million, due to the estimate
run-up in property values in that area. Despite
 -​ Only record those transactions that an Cr. Revenue: 100
auditor could reasonably be expected to
When the same snow plowing service is paid
verify through normal audit procedures.
$1,000 in advance to plow a customer's parking
If the transaction cannot be verified, the
lot over a four-month period. In this case, the
auditor may require reversing the entry.
service should recognize an increment of the
To avoid issues, do not record
advance payment in each of the four months
unverifiable transactions initially.​
covered by the agreement, to reflect the pace at
which it is earning the payment.
REVENUE RECOGNITION PRINCIPLE
Journal entry on the month the cash was
-​ States that you should only record received
revenue when it has been earned, not
Dr. Cash: 1,000
when the related cash is collected
-​ If payment from a customer is doubtful, Cr. Unearned Revenue: 1,000
the seller should record an allowance for
doubtful accounts for the expected Since it is an advance payment, the snow

uncollectible amount. If there is plowing service will only recognize revenue

significant doubt about payment, every month.

revenue should not be recognized until

Journal entry at the end of each month:
payment is received.
Dr. Unearned revenue: 250
Example:
Cr. Revenue: 250
A snowplowing service completes the plowing
of a company's parking lot for its standard fee of Five-step process for establishing revenue
$100. It can recognize the revenue immediately recognition
upon completion of the plowing, even if it does
Step 1: Link the contract with a specific
not expect payment from the customer for
customer
several weeks

-​ Make sure there’s a clear agreement

Journal Entry
with the customer.
Dr. Accounts receivable: 100
Step 2: Note contractual performance -​ It ensures consistency in financial
obligations reporting and allows comparison over
time (month to month, year to year)
-​ List the goods or services you agreed to
-​ This is needed by investors, lenders, and
provide
others who read the financial statements

Step 3: Determine the price and who may want to conduct

multi-period analyses.
-​ Decide how much the customer will pay
Example:
Step 4: Match the Price to Performance
Obligations -​ Income statement = “For the eight
months ended August 31” (January 1 to
-​ If your contract includes more than one August 31)
product or service, you need to divide -​ Income statement = “For the month
the total payment between those items ended August 31” (August 1 to August
fairly 31)
-​ Balance sheet = “As of August 8, 2025”
Step 5: Recognize Revenue as Obligations are
Fulfilled

-​ Recognize it as a revenue when the

business has done its part of the
deal—when the customer has control on
it
-​ “Control” means that a customer can use
it, sell it, or benefit from it.

TIME PERIOD PRINCIPLE

-​ A business must report its financial

performance and position over set,
consistent time periods (e.g., monthly,
quarterly, yearly)