Understanding PGC: Accounting Principles and Audit Essentials

Posted on Apr 1, 2025 in Business Administration and Innovation Management

Understanding the PGC Framework

The PGC (Plan General de Contabilidad – General Accounting Plan) comprises five key parts:

  1. Conceptual Framework (1a):
    • Marc Accounting: Annual accounts should accurately reflect the company’s assets, financial position, and results. Information contained in annual accounts should be relevant and reliable, adhering to accounting principles.
    • Elements of Financial Statements: Assets (A), Liabilities (P), Net Worth (NP), Expenses (D), Income (Y).
    • Criteria for Registration: Evaluation criteria include historical cost, fair value, net realizable value, present value, and value to the user.
    • Accounting principles and generally accepted accounting standards.
  2. Registration and Assessment Standards (2a): Development of accounting principles and other provisions of the conceptual framework.
  3. Annual Accounts (3a): Balance Sheet (BS), Profit and Loss Statement (P&L), Statement of Changes in Equity, and Explanatory Notes.
  4. Chart of Accounts (4a): Divided into 9 groups.
  5. Accounting Definitions and Relationships (5a): Describes the reasons for each debit and credit of an account. (Parts 4 and 5 are advisable but not compulsory.)

Key Accounting Principles

Accounting principles ensure that statements accurately reflect the company’s assets, financial position, and financial results.

  • Accrual Principle: Income and expenses should be recognized in accordance with the actual flow of goods and services, regardless of when payment is made or received.
  • Going Concern Principle: The company is assumed to have an unlimited duration. Therefore, accounting principles are applied without intending to determine the liquidation value of its assets.
  • Non-Compensation Principle: Assets and liabilities in the Balance Sheet, or expenses and income in the P&L, cannot be offset. Each item should be clearly and separately stated in the annual accounts.
  • Consistency Principle: Once an accounting and valuation criterion is adopted, it must be maintained and applied consistently to assets with similar characteristics. Any changes to the criteria should be disclosed in the notes to the financial statements.
  • Materiality Principle: Strict application of certain principles is not required when their impact is insignificant.
  • Prudence Principle: Only realized profits at the closing date of the fiscal year are recognized. Risks and potential losses are also accounted for.

Understanding Audits

An audit analyzes whether the entries in the accounting records adequately describe the events that have occurred. It aims to produce a report on the reliability of the financial information analyzed.

The audit is conducted by an auditor, and the information is available to all stakeholders. While not all companies are required to undergo an audit (small and medium-sized enterprises may be exempt), a court order can mandate it, and it must be recorded in the commercial register.

Types of Audits:

  • Based on Source:
    • External: Review of annual accounts by an independent professional firm.
    • Internal: Conducted by company personnel.
  • Based on Content and Purpose:
    • Operational: Review of the company’s procedures to analyze the effectiveness and efficiency of the overall structure in terms of objectives and planning.
    • Financial: Examination and verification of the company’s financial statements to ensure the reliability of the reflected data.