Accounting Principles and Business Obligations for Companies

Posted on Oct 3, 2024 in Economy

Accounting Concepts

Definition

Accounting is the science that studies and analyzes the economic resources and their movements within a company.

Key Terms

• Heritage: Includes property, rights, debts, and obligations.
• Assets: Property and rights.
• Liabilities: Debts and obligations.
• Inventory: Detailed list of a company’s assets and liabilities.
• Journal: A chronological record of financial transactions.
• Ledger: A collection of accounts that summarize financial transactions.
• Book of Accounts: Includes inventory, balance sheet, and supporting documentation (Commercial Code).

Objectives of Accounting

The accounts must accurately represent the assets, financial condition, and results of the company.

Annual Accounts

• Balance Sheet: Presents the economic and financial situation of the company at a specific point in time.
• Profit and Loss Account: Shows the profit or loss experienced by the company throughout the year.
• Statement of Changes in Net Worth: Details changes in corporate capital (Assets – Liabilities = Net Worth).
• Statement of Cash Flows: Explains where the company obtained cash and how it was used.
• Notes to the Financial Statements: Provides detailed explanations and comments on the information presented in the other financial statements.

Stakeholders

Stakeholders who use accounting information include the Commercial Register, finance departments, third parties, owners, suppliers, customers, and employees.

Accounting Principles

The company’s accounts, including recording and valuation, must adhere to the following accounting principles:

• Going Concern Principle: Assumes the company will continue to operate in the foreseeable future.
• Accrual Principle: Economic events are recorded when they occur, regardless of when payment is made or received.
• Consistency Principle: Once an accounting method is adopted, it should be maintained for similar transactions and conditions.
• Prudence Principle: Requires cautious estimates and valuations, recognizing profits only when realized and anticipating potential losses.
• Non-Compensation Principle: Assets, liabilities, expenses, and income should not be offset against each other. Each accounting event is assessed separately.
• Materiality Principle: Strict adherence to principles is not required for insignificant items that do not affect the overall financial picture.

In Case of Conflicting Principles

Apply the principle that best reflects the true image of the company’s assets, financial position, and results.

Valuation of Accounting Records (SMEs)

Fixed Assets

Initial Measurement

• Tangible fixed assets are valued at cost, which can be the purchase price or the cost of production.
• Non-recoverable indirect taxes are included in the purchase price.
• Purchase Price: Includes the invoiced price minus discounts plus expenses incurred to bring the asset into operating condition.
• Cost of Production: Includes the cost of raw materials, direct labor, and other directly attributable costs, plus a reasonable allocation of indirect costs.

Subsequent Measurement

• Tangible fixed assets are valued at their acquisition or production cost less accumulated depreciation and any impairment losses.
• Depreciation: The systematic allocation of an asset’s cost over its useful life, considering its residual value.

Derecognition

• Fixed assets are derecognized upon disposal or when no future economic benefits are expected.

Company

Definition

A company is a formal organization with personal, material, and immaterial elements, aiming for profit, social service, or leisure through the production of goods and services.

Formal Organization

Requires meeting formal incorporation requirements.

Elements:

• Personal: Entrepreneur, manager, workers.
• Material: Assets (furniture, equipment, transport), business name.
• Immaterial: Patents, trademarks, brand reputation, worker training, software.

Classes of Companies

According to Activity

• Industry: Transforms raw materials into finished products.
• Business: Sells manufactured or purchased products.
• Services: Offers services for profit.

According to Capital Source

• Public: Capital comes from the state or public administration.
• Private: Capital comes from private investors.
• Mixed: Capital comes from both state and private investors.

According to Legal Form

• Companies: Governed by the Commercial Code (SA, SL/SLU).
• Civil Society: Governed by the Civil Code (Community Property).
• Associations: Governed by the Law of Associations.
• Cooperatives: Governed by the Cooperatives Act.
• Self-Employed: Governed by the General Law of Social Security.

Liability

• Limited Liability: SL and SA companies.
• Unlimited Liability: Self-employed individuals and civil societies (joint and several liability).

Internal Business Organization

Management

Management sets direction, leads, and directs the company. It can be exercised by one person, several people, or a board of directors.

Departments

Companies are often organized into departments based on various criteria:

• Functional: Based on the functions performed (e.g., purchasing, sales, production, finance, HR, administration).
• Geographical: Based on geographical areas of operation.
• Product/Service: Based on the products or services offered.
• Process: Based on different stages of the manufacturing process.

Organizational Charts

Graphical representations of a company’s structure, showing departments, hierarchies, and reporting relationships.

Types of Charts

• Vertical: Top hierarchy at the top, descending downwards.
• Horizontal: Top hierarchy on one side, extending horizontally.
• Concentric: Top hierarchy in the center, radiating outwards.

Business Obligations

Tax Obligations

• Social Security: Contributions for workers and employers.
• City Tax: Tax on Economic Activities (IAE).
• VAT (Value Added Tax): Indirect tax on consumption. Declared quarterly (Form 303, annual Form 390).
• Income Tax: Quarterly returns (Form 130 for general scheme, Form 131 for simplified scheme).
• Withholding Taxes:
  • Form 110 (quarterly) and 190 (annual): Withholding for employees and professionals.
  • Form 115 (quarterly) and 180 (annual): Withholding for lease payments.
• Form 347 (annual): Reporting transactions with third parties exceeding €3,006.06.
• Corporate Tax (SL and SA): Annual income tax declaration (Form 200).

Setting up an SL Company

Steps involved in setting up a limited liability company (SL):

1. Request negative certification of company name.
2. Draft and notarize the company’s statutes and public deed of incorporation.
3. Pay Transfer Tax and Stamp Duty (Form 600) and apply for IAE (Form 840).
4. Register with the tax authorities and obtain a CIF (Forms 036 and 037).
5. Register the company in the Mercantile Registry.
6. Obtain an opening license from the city hall.
7. Register the company and employees with Social Security.
8. Obtain the company’s visitor’s book from the labor authorities.
9. Register trademarks and patents (if applicable).
10. Create work schedules for employees.
11. Establish internal organization and management structure.