Understanding Company Elements and Accounting Principles

Posted on Mar 7, 2025 in Business Administration and Management (BAM)

Company Elements and Financial Resources

Company: A set of material and financial resources with a common goal and a certain permanence in time.

Company Ownership Types

  • A) Individual: Single owner.
  • B) Collective (Society):
    • B.1) Of people.
    • B.2) Anonymous (Corporation).

Company Departments

General Management | Finance | Purchasing or Production | Marketing | Industrial Relations.

Optimal Information for Decision-Making

Optimal Information (Reliable): Rational / Opportunities.

  • R => Significant / Full / Economic
  • S => Exact / Truthful / Clear / Referred to a level.

Accounting Fundamentals

Accounting Functions

Recording, reporting, control.

Accounting is the science that coordinates and provides appropriate book entries for operations executed by a commercial enterprise, in order to know the location of the company, determine the results, and explain the causes that have produced these results.

Generally Accepted Accounting Principles

  1. Monetary Unit: Common denominator.
  2. Business Entity: Separate from its owners.
  3. Going Concern: Assumes continued operation.
  4. Historical Cost: Assets recorded at acquisition cost.
  5. Double-Entry Bookkeeping: Every transaction affects at least two accounts.
  6. Invariability: Consistent application of accounting methods.
  7. Revenue Realization: Revenue recognized when earned.
  8. Consistency: Uniform application of principles over time.
  9. Conservatism: Prudence in recognizing revenues and expenses.
  10. Materiality: Focus on significant financial information.

Chart of Accounts and Auditor Treatment

Chart of Accounts

A systematized grouping of all accounts necessary for the company, listing assets, liabilities, losses, profit, order, etc., to ascertain the conformation of the asset composition of liabilities/capital. This plan must be rational, spacious, flexible, practical, and coded. Furthermore, it should include an accounts manual.

Treatment of Auditors

A study group determines the inventory equation, account classes, debits and credits, balance, etc. It may be general or specific.

  • General: Understands how various accounts affect debits and credits.
    • Debit: Increases asset accounts, decreases liability and capital accounts (increases expense/loss accounts, decreases revenue/gain accounts).
    • Credit: Decreases asset accounts, increases liability and capital accounts (increases revenue/gain accounts, decreases expense/loss accounts).
  • Specific: Surveys each account and discusses:
    1. Type of account value.
    2. Account type (Asset, Liability, Owner’s Equity, Revenue, Expense).
    3. Charges that affect it.
    4. Balance to maintain.
    5. Sign of balance.
    6. Balance verification.

Example Accounts

Joint Account

Accounts that change classes (e.g., from liability to asset).

Cash Account

  • a) Cash, entry and exit, checks provided by others and not yet deposited, and cash-valued species.
  • b) Assets.
  • c) Debited for money entering (income).
  • d) Credited for cash outflows (expenses).
  • e) Debit balance (there will never be more money leaving than entering).
  • f) Total cash is verified by a physical count of cash (cash count).

Bank Account

  • a) Money deposited in a bank checking account and cash.
  • b) Asset or liability (if overdrawn).
  • c) Debited for deposits (in cash or third-party checks), bank loans, and securities for the company.
  • d) Credited for checkbook value checks, check writing, collection fees, returned checks to a third party (already held), interest, taxes, etc.
  • e) Debit balance (in favor of the company in the bank), credit balance in case of overdraft (bank debt).
  • f) Verified through bank reconciliation (between the bank statement and the ledger or checkbook).

Furniture and Fixtures Account

  • a) Movement of furniture and assets used for the operation of the company.
  • b) Asset; it is an asset of the company.
  • c) Debited for purchases of furniture and office equipment (acquisitions).
  • d) Credited for depreciation or occasional sales.
  • e) Debit balance.
  • f) The value of furniture and assets is verified by physical inventory.