Fundamental Accounting Principles and Concepts

Classification by Economic Activity

Extractive

Industrial or manufacturing

Commercial

Financial

Service companies

Core Accounting Principles

Equity

Equity between competing interests must be a constant concern in accounting, as those who use accounting data often have conflicting interests. Financial statements are prepared to fairly reflect the different interests at stake in a given entity.

Accounting Entity

Financial statements relate to specific economic entities, which are distinct from their owner or owners. It is important to note that companies are legal entities separate from the natural persons who own them.

Going Concern

It is assumed that there is no time limit on the operational continuity of the economic entity. Anyone who creates a company intends for it to endure; no one establishes a company with the intention of closing it in the short term.

Economic Goods

Financial statements relate to events, resources, and financial obligations that can be valued in monetary terms. Accounting is presented in quantitative terms, allowing us to determine the numerical results of management within a given period.

Currency

Accounting is measured in monetary terms, which allows heterogeneous components to be reduced to a common denominator. Accounting must be carried out in the legal currency of the country (e.g., the Chilean peso).

Time Period

Financial summary information concerns specific time periods, formed by the normal cycle of operations of the entity or other legal requirements. This is typically referred to as the accounting cut-off, which firms usually perform on December 31st.

Accrual Basis (Earned)

The determination of operating results and financial position should take into account all resources and obligations of the period, regardless of whether they have been collected or paid. This ensures that costs and expenses are properly matched to the revenue they generate.

Realization

Economic results should only be recognized when they are realized, or when the operation is perfected from the point of view of applicable law or trade practices, and all risks inherent in such an operation have been correctly weighted.

Historical Cost

The recording of transactions is based on historical costs (production, purchase, or exchange), unless a different criterion (such as realizable value) is justified. Corrections for currency fluctuations are not alterations to this principle, but mere adjustments to the numerical expression of the respective costs.