Accounting Principles and Relationships
Accounting Principles
The basic accounting principles governing financial statement preparation are crucial for firm performance. These statements assume the company’s continued operation. Key principles include:
- Accrual: Records transactions when they occur, not when cash changes hands.
- Consistency: Maintains consistent criteria over time, with changes disclosed.
- Prudence: Applies caution in estimates, recognizing benefits at the closing date and losses as soon as known.
- Non-Compensation: Prohibits offsetting assets, liabilities, expenses, and income.
- Materiality: Allows flexibility for insignificant items.
Accounting Relationships: PGC Groups
The PGC (General Accounting Plan) categorizes financial elements into groups:
Group 1: Basic Financing
Includes equity and long-term debt, used to finance permanent assets and working capital.
Group 2: Fixed Assets
Long-term assets, including establishment costs and deferred expenses.
Group 3: Inventories
Goods, raw materials, work-in-progress, finished products, byproducts, waste, and recovered materials.
Group 4: Trade Payables and Receivables
Short-term assets and liabilities from the company’s usual activity and receivables from the government.
Group 5: Financial Accounts
Short-term debts and credits from non-operating activities and liquid assets.
Group 6: Purchases and Expenses
Procurement of goods and services, expenses, inventory changes, and extraordinary losses.
Group 7: Sales and Income
Sales of goods and services, other income, inventory changes, and extraordinary gains.
Working Capital
Working Capital is the portion of current assets funded by non-current liabilities and equity. It represents the resources needed to fund operations between paying suppliers and receiving payments. A shorter period between these events reduces the required working capital.
Formula: Working Capital (WC) = Current Assets (CA) – Current Liabilities (CL)
Alternatively: WC = (Equity + Non-Current Liabilities) – Non-Current Assets
Working capital signifies:
- Resources needed for business activity.
- Permanent resources used to achieve operational stability.
General Accounting Plan (GAP) Structure
The GAP is divided into five sections:
- Conceptual Framework: General rules for accounting entries, ensuring a true and fair view of the company.
- Rules of Recording and Valuation: Asset valuation rules.
- Annual Accounts: Instructions for preparing financial statements.
- Chart of Accounts: Standardized names and codes for all financial elements.
- Definitions and Accounting Relationships: Content and function of all company accounts.