Accounting Essentials: Financial Statements and Business Assets

Core Accounting Concepts

Accounting Fundamentals

Accounting is a branch of economics that studies business assets, the rules, and the principles upon which a company's financial information is recorded. It provides a static snapshot of a company's financial health and aims to deliver crucial information to various levels and users within and outside the business, including:

• Managers
• Owners or Shareholders
• Workers
• Company Creditors
• Public Administration (for tax purposes)
• Unions

Understanding Business Assets

Business assets encompass the entire set of rights, tangible and intangible assets, and liabilities that a company possesses, valued in relation to its operational objectives.

Assets: Economic Structure of a Company

Assets represent the economic structure of a company, signifying its total investment or the allocation of its funds.

Total Equity and Liabilities

Total equity and liabilities collectively reflect a company's financial structure.

Assets and Liabilities Defined

Assets and Liabilities are the goods, rights, and obligations that constitute the pools of resources and obligations, which together form the overall assets of the company.

Key Financial Statements and Regulations

General Accounting Plan (GAP)

The General Accounting Plan (GAP) is a mandatory framework implemented for all companies required to keep financial records, regardless of their legal form.

Conceptual Framework of the GAP

Within the Conceptual Framework, it is crucial to distinguish between:

1. Annual Accounts: These are the financial statements, which for Small and Medium-sized Enterprises (SMEs) typically include:

   • The Balance Sheet
   • The Profit & Loss (P&L) Statement
   • The Statement of Changes in Equity
   • The Notes to the Financial Statements (Memory)

2. Information Requirements for Annual Accounts: The information included in the annual accounts must meet specific criteria:

   • Relevance: It must help in evaluating past, present, or future performance, or confirm/correct past evaluations.
   • Reliability: The annual accounts must be free from significant errors and bias.

3. Purpose of Annual Accounts: Annual accounts are financial statements that report a company's results and its financial condition. The key financial statements are:

   • Balance Sheet: Provides information on the company's financial situation at the end of a fiscal year.
   • Profit & Loss (P&L) Statement: Shows the company's performance during a financial year.
   • Notes to the Financial Statements (Memory): Offers additional information crucial for decision-making.
   • Statement of Changes in Equity: Details changes in the composition of equity.
   • Cash Flow Statement: Illustrates changes in the company's cash and cash equivalents.

The Balance Sheet

The Balance Sheet is a financial document that presents a company's assets, liabilities, and equity at a specific point in time.

Profit & Loss (P&L) Statement

The Profit & Loss (P&L) Statement, also known as the Income Statement, is a financial statement that calculates the financial performance (profit or loss) a firm has achieved over a specific accounting period.