Key Accounting Concepts and Financial Statements
Accounting Principles
These principles guide the valuation of economic events and assets, shaping the portrayal of a company’s financial position and performance.
- Going Concern Principle: Assumes the company will continue operating in the foreseeable future, meaning accounting principles are not applied to determine liquidation value.
- Accrual Principle: Transactions are recorded when they occur, regardless of when payment is made or received, ensuring accurate reflection of financial activity within the accounting period.
- No-Netting Principle: Assets and liabilities, or income and expenses, cannot be offset against each other. Each element must be assessed separately for transparency.
- Consistency Principle: Once an accounting method is chosen, it should be applied consistently over time for similar transactions, unless there’s a valid reason to change. Any changes and their impact must be disclosed.
- Prudence Principle: Caution should be exercised in estimations and judgments under uncertainty. However, this doesn’t justify undervaluing assets. Profits are recognized only when realized.
- Materiality Principle: Minor deviations from accounting principles are acceptable if their impact is insignificant and doesn’t distort the true financial picture.
These principles are based on established accounting standards found in:
- Commercial Code and other business laws.
- General Accounting Plan and sector-specific adjustments.
- Standards from the Institute of Accounting and Auditing (ICAC).
- Other applicable legislation.
Cash Flow Statement
This statement tracks the movement of cash and cash equivalents, including cash on hand, short-term bank deposits, and highly liquid financial instruments with maturities under three months.
It may also include cash from occasional discoveries if they’re part of regular treasury management.
Impairment
Impairment refers to reversible losses in asset value. It’s recorded as a reduction in the asset’s carrying amount on the balance sheet, reflecting potential but not definitive losses. When the loss becomes irreversible, the asset’s value is directly reduced and written off.
Statement of Changes in Equity
This statement has two parts:
- Statement of Income and Expenses: Shows changes in equity from profit/loss, items directly charged to equity, and transfers to/from the profit and loss account.
- Statement of Total Changes in Equity: Reports all equity changes, including those from transactions with shareholders, other comprehensive income, and adjustments from accounting policy changes or error corrections.
Amortization
Amortization represents the systematic and irreversible decline in an asset’s value over time. It reflects the consumption of fixed assets in the production process. Annual amortization is recorded as an expense, reducing the asset’s carrying amount. Land is generally not amortized, except for mines and quarries. Goodwill is subject to annual impairment testing.