Accounting Principles and Practices

Posted on Oct 16, 2024 in Economy

Accounting

Definition: Accounting is an economic and social science that studies economic realities. It is a system that captures, processes, and communicates useful information to internal and external users to provide a framework for making informed decisions.

Types of Users

Internal Users: Individuals or entities within the company who need information to make decisions (e.g., management, shareholders). They require analytical accounting information.

External Users: Individuals or entities outside the company who need information to make decisions about the company (e.g., competitors, creditors, suppliers). They are recipients of financial accounting information.

Stages of the Accounting Process

Identify Accounting Events: An accounting event is a significant occurrence that directly affects the company now or in the future.
Value Accounting Events.
Record Accounting Events in the Journal and Ledger.
Summarize Accounting Events in the Annual Accounts: The accounting cycle ends with the preparation of annual accounts, which summarize the economic processes of a fiscal year. These documents must be clear and show the true image of the company’s assets, liabilities, and equity. There are two models for annual accounts: normal and abbreviated, depending on the company’s size. The size is determined by three parameters: total assets, revenue, and the average number of employees. The annual accounts have five parts: balance sheet, income statement, statement of changes in equity, statement of cash flows, and notes to the financial statements.
Audit the Annual Accounts: Verify that the annual accounts comply with accounting standards.
Communicate the Annual Accounts.
Analyze the Annual Accounts.

Balance Sheet

Definition: The balance sheet is a part of the annual accounts that summarizes the company’s assets and liabilities at the end of a period. It follows the ordering norms of the General Accounting Plan (PGC). Assets are ordered from least to most liquid and liabilities from least to most enforceable. The balance sheet is prepared at the end of each accounting period. It only shows asset and liability accounts. Its purpose is to inform external users about the company’s financial position. (No offsetting and relative importance are considered).

Income Statement

Definition: The income statement provides a dynamic view of the net generation of resources attributable to the fiscal year. It is a summary of income and expenses (no offsetting, relative importance, prudence, and accrual accounting are considered).

Assets

Definition: Assets are resources controlled by the company as a result of past events from which the company expects to obtain future economic benefits. They can be current assets (AC) and non-current assets (ANC).

Liabilities

Definition: Liabilities are present obligations arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. They are the company’s obligations to third parties.

Equity

Definition: Equity is the residual interest in the assets of the company after deducting all its liabilities (capital, reserves, and profit & loss).

Trial Balance

Definition: The trial balance is an unordered list of accounts that is prepared quarterly to verify that the sum of debits equals the sum of credits. It is not part of the annual accounts and is independent. It has no specific order.

Income

Definition: Income is the increase in the company’s equity during the year, either in the form of inflows or increases in the value of assets, or decreases in the value of liabilities, always originating from transactions with third parties, excluding contributions from partners.

Operating Income: The value of services rendered, goods delivered to third parties in the development of the company’s typical activities, for which the company receives consideration.

Financial Income: Returns (interest, dividends, and capital gains) generated by current accounts, deposits, and investments in other companies.

Expenses

Definition: Expenses are the decrease in the company’s equity during the year, either in the form of outflows or decreases in the value of assets, or increases in the value of liabilities, always originating from transactions with third parties, excluding distributions to partners.

Operating Expenses: Consumption of goods and services incurred during the development of the company’s typical activities.

Financial Expenses: Expenses arising from the use of external financing. The use of external capital comes at a cost known as interest expense, which is a financial expense for the borrower. Losses in the value of investments are also considered financial expenses.

Common Accounts

Suppliers: Obligations to pay for goods or services acquired in the normal course of business.

Customers: Rights to collect for goods or services sold in the normal course of business.

Creditors: Obligations to pay arising from various transactions.

Debtors: Rights to collect arising from various transactions.

Cash: Money readily available.

Fixed Assets: Long-term tangible assets used in the company’s operations.

Inventory Valuation Methods

Single Account Method (Mandatory for Non-Current Assets)

Entries and exits are recorded in the same account at their respective values.
Acquisition and disposal prices are recorded.
The profit or loss from the sale of the asset is immediately recognized.

Speculative Divisional Account Method (For Current Assets)

Purchases are recorded in the “Purchases” account and sales in the “Sales” account.
Inventory is counted and recorded in the “Inventory” account.
Entries are valued at acquisition prices.
Exits are valued at selling prices.
The profit or loss from inventory operations is not immediately recognized.
At the end of the period, the inventory balance is adjusted to its fair value.