Accounting Fundamentals: Objectives, Users, and Business Assets
1. Defining Accounting: Objectives and Users
Companies rely on economic information provided by accounting to make informed decisions. Accounting is the science that studies a company’s economic assets, applying norms and scientific principles to record financial information. This study is conducted statically, by observing the company’s wealth at a specific time, and dynamically, by recording changes over time. Accounting provides crucial information, a vital tool for businesses. With accurate economic data, management can make better decisions. Therefore, the importance of accounting lies in its ability to generate valuable information. The purpose of accounting is to furnish financial information to various users within and outside the company: managers, for decision-making and planning; owners or shareholders, to ensure their interests are protected; workers, as the company’s performance affects their job security; and creditors, to assess the company’s reliability and ability to meet its obligations.
Finance
2. Business Patrimony: Concept
Understanding Business Assets (P)
A company’s patrimony or business assets comprise its assets, rights, and obligations, duly assessed in relation to its purpose. The difference between a company’s assets and rights and its obligations represents its net worth. In accounting, this is expressed as: Net Assets = Assets + Rights – Obligations.
Assets and rights are collectively known as assets, while obligations are liabilities. Thus, Equity = Assets – Liabilities. The total assets equal the sum of net assets and liabilities. This fundamental equation represents the company’s assets: assets represent the total investment, while equity and liabilities are the sources of financing.
Modern accounting is based on two key operations: the source of funds and their application. Logically, both aspects must balance, i.e., Assets = Equity + Liabilities.
Asset Mass Definition
We classify business assets elements using uniform criteria. Masses represent groups of assets categorized by a homogeneous basic criterion. The most common criterion ranks assets by availability or liquidity and liabilities by demandability.
Asset masses can be grouped by their duration within the company. Accordingly, assets are classified into non-current assets and current assets.
Non-Current Assets
These are assets tied to the company for over a year. Non-current assets include tangible assets, long-term financial investments, and real estate investments:
- Fixed Assets: These facilitate productive activity and are acquired for continuous use. This includes tangible fixed assets (buildings, machinery, furniture), intangible fixed assets (patents, software), and depreciation of fixed assets.
Current Assets
These assets are in constant rotation, renewed several times within a fiscal year. Current assets comprise inventories, receivables, and cash:
- Inventories: Materials used in manufacturing or finished goods for sale.
- Receivables: Loans and rights in favor of the company for completed operations, expected to be collected shortly. This includes situations where goods or services are sold but not yet paid for, creating a debt in favor of the company.
- Cash: Liquid assets immediately available.
Equity
Represents the company’s resources allocated for funding, including contributions from partners (capital).