Business Accounting: Assets, Liabilities, and Equity

Accounting and Its Function

Accounting serves to collect and quantify economic-financial information generated within a business. This information is then communicated to end-users so that, once verified and analyzed, it can influence decision-making.

Accounting Information

Key components of accounting information include:

1. Mandatory accounting books
2. The annual accounts (balance sheet and profit and loss account)
3. The accounting mechanics

Required Accounting Books

• Accounting-General Plan: Mandatory annual accounts for small companies:
  • Balance sheet
  • Income statement
  • Statement of changes in equity
  • Notes
• Commercial Code:
  • Book inventory and annual accounts
  • General ledger

The Annual Accounts

Balance Sheet

The balance sheet is an accounting document that reflects the company's assets at a given time. It consists of two parts: assets, and equity and liabilities.

Concept of Equity: A set of assets less liabilities and rights, properly valued in monetary terms.

Property Rights and Liabilities = Net Equity

The representation of the company's financial position at a given time is known as the Balance Sheet.

• Assets: Represents everything the company owns (investments).
• Liabilities: Represents all sources of funding.

Assets = Liabilities

Concept of Equity Mass: Homogeneous groups of items based on criteria such as their degree of permanence in the company or their enforceability by creditors.

Economic Elements and Masses: Property, rights, and obligations are grouped into masses or sub-masses with common characteristics. The two main masses are:

• Assets (Investment): Elements required to operate the company.
• Liabilities (Funding): Debt and equity.

Assets (From Low to High Liquidity)

• Fixed Assets: Represents the goods that will remain permanently in the company (e.g., a car). These assets last for more than one year.
• Current Assets: Items, goods, and rights that vary during the process (elements that change). These assets last for less than one year.
  • Inventory: (e.g., clothing in a store). Goods.
  • Receivables: (e.g., debts owed to the company). Customers, receivables.
  • Cash and Cash Equivalents: (e.g., money in a bank account). Banks and savings banks.

Liabilities (From Low to High Enforceability)

• Fixed Liabilities:
  • Net or equity (not required)
  • Long-term payables
• Current Liabilities:
  • Short-term payables

Liquidity and Enforceability

1. Liquidity: The ability of an asset to be converted into cash (coins).
2. Enforceability: The legal possibility that a creditor can demand payment of their claim.

Balance Sheet Analysis

Analysis of the balance sheet involves examining the balance between assets (investments) and liabilities (financing). You can extract valuable information from the balance sheet. An important aspect is the balance between assets and liabilities, i.e., between investment and financing.

Principle of Financial Prudence: This principle requires that the acquisition of fixed assets be financed with fixed liabilities (permanent capital, either equity or long-term debt).

Second Principle: Ideally, current liabilities should fund current assets, meaning current liabilities should equal current assets. However, to avoid financial problems, it is necessary that what is to be collected within a year is greater than what is to be paid during that period. (Current assets should be greater than current liabilities).