Accounting Fundamentals: Principles, Books, and Standards

Accounting Fundamentals

Accounting is defined as the science that informs traders of the composition of their assets, as well as operations that modify them, using specific books and accounting records. Its purpose is to provide an economic and financial rating of a company.

Objectives of Accounting

• Financial Situation: Inform the economic and financial situation of the company and its patrimony. This data is collected through inventory balances and, more recently, the statement of changes in net equity.
• Performance Reporting: Report the results of losses or gains obtained during the development of the company's financial activities, typically shown through the profit and loss account.
• Contextual Analysis: Report the causes behind these results and the most significant changes that have occurred in equity, documented in the company's annual report (memory).

Types of Accounting Books

• Journal Book: A daily log that records all accounting actions in chronological order that modify the company's heritage.
• Ledger: Records events for each specific account, similar to how a bank statement tracks individual transactions.
• Inventories and Annual Accounts Book: Shows the inventory of all patrimonial items of the company at the end of the year.

General Accounting Plans

In Spain, there are two primary frameworks: the General Accounting Plan and the SME General Accounting Plan (approved in 2007). Companies may adopt the SME plan if they meet at least two of the following requirements for two consecutive years:

• Total assets do not exceed €2,850,000.
• Net annual turnover does not exceed €5,700,000.
• Average number of employees does not exceed 50.

Specific criteria for micro-enterprises apply if they meet two of the following for two consecutive years:

• Total assets do not exceed €1,000,000.
• Net annual turnover does not exceed €2,000,000.
• Average number of workers does not exceed 10.

Accounting Principles

• Going Concern: The company is assumed to continue its activity; therefore, valuation is not based on liquidation value.
• Accrual Basis: Expenditures and incomes must be recorded on the date they occur.
• Uniformity: Once a valuation method is chosen, it must be applied consistently throughout the year.
• Prudence: Companies must exercise caution to avoid overstating assets or income.
• Non-compensation: Assets and liabilities, or income and expenses, cannot be offset against each other; they must be assessed separately.
• Relative Importance: Financial statements should focus on material information that influences economic decisions.