Understanding Legal, Economic, and Financial Concepts

Posted on Feb 19, 2025 in Mathematics

Legal, Economic, and Financial Concepts

Legal: Patrimony provides for a set of goods, obligations, and rights, obtaining X. Unlike equity (Assets + Net + Rights = Patrimony + Obligations).

Economic: Financing = Liabilities (Capital + Liabilities). Inversion = Active (Real + Rights).

Financial: Expresses the set of assets, obligations, and rights as monetary equivalents. Assets = Liabilities, duly valued.

Accrual Accounting

Accrual is the application of accounting magnitudes to a concrete time period (fiscal year = 1 year). Methods:

  • By imputation: Expenses are determined in the amount claimed for each year.
  • Functional: The assets and liabilities, with their corresponding values, which are the heritage of an entity at the end of a fiscal year, automatically pass to the following year.
  • Inventory: The value of ending stocks in the warehouse is calculated by means of an inventory. A set of transactions and records is performed in order to calculate the result implicit in certain operations.

Principle of Duality or Double Entry

The principle of double entry is:

  1. The guiding principle for the interpretation of accounting facts.
  2. The starting point for the construction of an accounting system.
  3. Allows for double equality to be maintained: A = P and D = H.
  4. Characteristic of the accounting method.
  5. A way of seeing and understanding accounting facts, according to which a relation of cause (origin of value) and effect (application of value) is established.

To analyze an accounting event, the measurement principle for double entry is: Find the elements involved in the transaction and identify the type of movement.

Functions and Structure of the Account

Functions: Representative, coordinator, sorting, historical, numerical, and defensive.

Structure: A ‘T’ with two sections: the left (debit) and the right (credit).

General Theory of Charge and Payment

  1. Personal Theory: Considers that accounts represent people: debtors and creditors, managers, and owners. The debit and credit criteria are determined by the following reasoning: any transaction will inexorably have two different parts: debtor and creditor.
  2. Materialist Theory: Considers that accounts represent material things. The debit and credit approach is based on what is reported to be entering (debit) and exiting (credit).
  3. Value Theory: Considers that accounts represent values. Divides accounts into integrals (current and passive) and differentials (net and score).
  4. School Mathematics: Starts from the patrimony equation: A = P + N.
    • Initial situation: A¹ = P¹ + N¹
    • Final Location: A² = P² + N²
    • Variations that each member can suffer to move from baseline to the final:
      • A² = A¹ + ΔA¹ – ΔA¹
      • P² = P¹ + ΔP¹ – ΔP¹
      • N² = N¹ + ΔN¹ – ΔN¹
    • Conclusion: A² = P² + N². Debit: A + ΔP + ΔA; Credit: ΔA + P + ΔP + N + ΔN
  5. Economigraphic Theory: Every accounting entry has two parts: one that is the cause, origin, or financing, and the other that is, consequently, the employment, application, or value of the account, which is the inversion. The origin gets an entry in the credit. The employment is an entry in the debit.

Technical Account Concepts

  • Open an account: Giving a title and the corresponding code to represent an asset or liability.
  • Charge an account: Write an amount in the debit.
  • Pay an account: Write an amount in the credit.
  • Balance of an account: Debit – Credit.
  • Settle an account: Note the balance of the account in the part where the sum is less, so that the sum of debits equals the sum of credits, and the balance is zero.
  • Closing an account: Adding the two sides of the account after having paid.

Patrimonial Masses: Classification of Assets

  1. Functional Criteria: Based on the average period of maturation, which is the time lag from the acquisition date of merchandise or raw materials until the date of charging clients for the sale of said merchandise. In each type of entity, the following can be distinguished:
    • Non-current assets: Goods and rights that participate in the activity of the entity for a period exceeding the average maturation period.
    • Current Assets: Goods and rights circulating from hand to hand in a continuous and repetitive cycle of holding the economic activity of the entity, keeping them on the entity does not exceed the average maturation period.
  2. Financial Criteria: Ranks assets on the economic mass by the degree of liquidity, i.e., the ability of an asset to become money.
    • Non-Current Assets: Goods and rights that take more than 1 year to convert into money.
    • Current Assets: Less than a year.