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Essential Accounting Principles and Financial Reporting Standards

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Fundamentals of Financial Accounting

Definition and Core Objectives

Accounting is a science that informs stakeholders about the composition of their assets.

Objectives of Accounting

  • Report on the economic and financial situation of the company and its assets.
  • Report the results of the losses or gains that are obtained.
  • Report the causes which have led to the results obtained.

Key Users of Accounting Data

Users rely on accounting information for decision-making:

  • Members (Shareholders/Owners): Want to know the return on their investment, dividends, and future returns.
  • The Directors (Management): Take into account the information provided by accounting for strategic decisions.
  • Creditors: Assess short- and long-term solvency and indebtedness.
  • Employees: Need to understand the economic and financial situation of the company.
  • Inland Revenue (Tax Authorities): Compare tax payments with the accounting information provided.

Legal Obligations and Types of Accounting

Accounting Obligations

All companies are required to maintain accounting records under the Commercial Code, which mandates the use of specific accounting books (the Journal, the Inventory Book, and the Annual Accounts).

Types of Accountancy

  • Macro-accounting (Macrocontabilidad): Includes national and regional accounts.
  • Micro-accounting (Microcontabilidad): Pertains to the accounting of firms, professionals, and individuals.

Accounting Normalization and Structure

Accounting Normalization

This is the process designed to facilitate the understanding and comparability of accounting information.

Structure of the General Accounting Plan (GAAP)

  1. Conceptual Framework: Essentials from which accounting standards are developed.
  2. Registration and Assessment Standards: Comprehensive and detailed rules for accounting and valuation.
  3. Annual Accounts: Describes the rules for the preparation of financial statements.
  4. Chart of Accounts: A collection of designations for multiple accounts.
  5. Definitions and Accounting Relations: Explaining the definition of each of the accounts.

Essential Requirements and Principles

Accounting Information Requirements

Accounting information must be:

  • Relevant: Important and timely for decision-making.
  • Reliable: Adjusted to reality and free from material error.
  • Clear (Intelligible): Easy to understand by users.
  • Comparable: Allowing comparison across periods and entities.

Fundamental Accounting Principles

These principles govern the preparation of financial statements:

  • Going Concern (Business in Operation): Assumes the company will continue its activity indefinitely.
  • Accrual Basis (From the Date of the Event): Registration of transactions occurs when the event happens, regardless of cash flow.
  • Uniformity: Accounting policies cannot be changed arbitrarily once adopted.
  • Prudence (Caution): If benefits are expected, they are not recorded, but if losses are expected, they must be recorded immediately.
  • Non-Compensation: Income and expenditure cannot be offset against each other unless specifically permitted.
  • Materiality (Relative Importance): Allows for exceptions to strict accounting rules if the item is insignificant.

The Annual Financial Statements

The Annual Accounts are accounting documents that provide a true and fair view of the assets, financial position, and results of the company.

Components of the Annual Accounts

  • Balance Sheet: Includes separately the assets, liabilities, and equity.
  • Income Statement: Gathers all revenue and expenditure for the year.
  • Statement of Changes in Equity: Reports the causes that have led to variations in the company's equity.
  • Notes to the Financial Statements (Memory): Provides further information and comments supporting the other accounts.
  • Statement of Cash Flows: Reports on the origin and use of monetary assets.

Accounting Audit and Tax Elements

The Audit of Accounts

An audit is an activity that issues a technical review report on the reliability of the accounting records audited.

Basic Elements of Taxation

Taxation is generally composed of three elements:

  • Fees: Payable as a consequence of having received a public service.
  • Special Assessments (Contributions Special): Levied when the taxpayer receives benefits from public works or services.
  • Taxes: The most important element in terms of government revenues, and they are mandatory payments.

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