Accounting and Financial Statements
Valuation of Assets
Tangible Fixed Assets
Tangible fixed assets should be valued at purchase price or cost of production. In the case of property acquired by gratuitous title, the market value shall be considered as the acquisition price.
Purchase Price: Includes the amount billed by the seller and the additional costs incurred up to its launch.
Cost of Production: For manufactured goods, it is obtained by adding the acquisition cost of raw materials to other costs.
Market Value: Is the price a potential acquirer is willing to pay.
Intangible Assets
Intangible assets are valued at their acquisition price or cost of production.
Securities
Includes the short and long-term investments made by the company.
Stocks
Stocks should be valued at purchase price or cost of production.
Acquisition Price: Includes the invoice price and all additional production costs.
Cost: Purchase price + premiums.
Methods of Stock Valuation
These are the weighted average price (involves the application of the arithmetic mean of individual items that make up the stocks) and the FIFO method (First In, First Out: merchandise leaves the warehouse in the order it arrived; the first units to come in are the first to go out).
Annual Accounts
Annual accounts include the Balance Sheet, Profit and Loss Account, and Report. They are mandatory.
True and Fair View
The preparation of accounts should aim to provide a true and fair view of the company’s assets. The aim is for the annual accounts to be clear and present the true image of the company’s equity.
Structure
There are normal and abbreviated structures.
Audit of Accounts
External Audit
Performed by an independent auditor to audit the financial statements. It examines whether the results have been properly recorded and if they reflect the true image of the business’s assets.
Internal Audit
Conducted by the company’s own staff. The internal auditor should be as independent as possible.
The Balance Sheet
Must clearly and accurately reflect the economic and financial situation of the company, as well as profits or losses realized at year-end. The balance sheet includes assets and liabilities. Assets include investments, income, and financing.
Social Responsibility
The concept of social responsibility maintains that the company should not focus solely on obtaining maximum profit but should also include social objectives. The company should justify its existence in society and assume social responsibility. The social balance sheet is a modern conception of the company.
The Profit and Loss Account
Quantifies the business income and describes its formation. It comprises the income and expenditure for the year and the outcome of the same. The profit and loss account is shown on the liability side of the balance sheet. Losses from previous years are reflected in the account “Losses of Previous Years”.
Results of the Year
Operating Results
Obtained by the difference between all costs and revenues associated with the company’s main activity.
Financial Results
Includes interest charges and allocations to provisions, and other financial income.
Pre-tax Results
Obtained by the addition of the previously stated results.
Year Results
All income and expenses flow into the profit and loss account.
Report
Completes, expands, and discusses the information contained in other documents that comprise the annual financial accounts. The content is mainly quantitative, but it also draws on two models. There are two types: normal and abbreviated. The contents of the report are reflected in the PGC (General Accounting Plan): Activity of the company, Basis of presentation of the annual accounts, Results, Recording and valuation standards, Environmental report, Grants, donations and bequests, Joint ventures, and other information. Another model is the abbreviated one, where the required level of detail is lower.
- The report model that appears in the PGC provides the minimum information to be included.
- It shall contain any other information not included in the PGC report model.
Equity
Set of quantifiable assets and liabilities belonging to a natural person or legal entity.
Organization
It is constituted by:
- Set of assets that the company owns. This set is the Active.
- Set of obligations that the company has to face. This set is the Passive.
Assets + Liabilities = Net Equity. Net equity is constituted by a set of items that are called own funds. Own funds are formed by the company’s debts. The annual accounts of a company are collected in a document called the Balance Sheet.
Accounting Standardization
It aims to establish an agreement on the name of each of the elements and concepts. The names of the accounts have been established with clarity. Accounting standardization allows the unification of accounting criteria by establishing a body of doctrine and adopting general rules applicable to all companies in Spain. The PGC establishes all the asset and liability accounts.
The Account
It is an instrument of representation and measurement of each equity element. It reflects the initial situation and the changes throughout the year. It is represented by a T-account and has two parts: Debit and Credit.
Equity
Set of homogeneous equity elements. Equity is divided into assets and liabilities. Assets are the goods and rights owned by the company, and liabilities are the company’s obligations or debts.
Non-current Assets
Formed by a set of elements whose function is to ensure the company’s life:
- Intangible assets: Set of elements constituted by rights susceptible to economic valuation.
- Tangible fixed assets: Tangible elements of sustainable use that are not intended for sale.
Current Assets
Elements whose purpose is to ensure the company’s activity. They are divided into elements depending on their conversion into liquidity, such as the realization of rights, elements that are immediately recoverable, and elements that are available as immediate liquidity.
Non-current Liabilities
Formed by contributions from the individual entrepreneur or partners and obligations that the company has to meet in the long term. It is composed of net equity or non-current liabilities and long-term liabilities. Net equity is formed by share capital, reserves, and retained earnings.
Current Liabilities
Set of elements that represent obligations that the company has to meet in the short term.