Principle 1
Revenue Recognition
Record revenue when it's earned, usually when the goods or services are delivered, not when the cash shows up.
ExampleYou finish a repair job in March and the client pays in April. The income belongs in March.
When it's missedMarch looks weak, April looks great, and neither month tells you the truth.
Principle 2
Matching (Expense Recognition)
Record expenses in the same period as the revenue they helped earn.
ExampleA store buys holiday inventory in October and sells it in December. The cost of that inventory is an expense in December, alongside the sales.
When it's missedOctober shows a loss, December shows a fat margin, and your real profit per sale is invisible.
Principle 3
Historical Cost
Record assets at what you paid for them, no matter how their market value moves later.
ExampleA company buys an office building for $500,000. It stays at $500,000 on the books even if real estate values skyrocket.
When it's missedThe balance sheet turns into opinion, and no lender or buyer will trust it.
Principle 4
Full Disclosure
Include every material fact a reader needs, with notes that explain it, so lenders and investors aren't misled.
ExampleIf the business faces a lawsuit that could threaten its finances, that risk goes in the notes.
When it's missedIt surfaces in due diligence instead, and the buyer starts wondering what else wasn't said.
Principle 5
Consistency
Use the same methods from one period to the next, so reports can be compared over time.
ExampleYou can't switch your inventory method every quarter without formally disclosing and explaining the change.
When it's missedThis year can't be compared to last year, and every trend line on your dashboard is suspect.
The point
Books a buyer can trust.
Lenders, CPAs and buyers read your books through these five principles. A team that understands them builds books that pass that test the first time.