Key Characteristics and Principles of Accounting

Key Characteristics of Accounting Information

Accounting information must be presented publicly with priority, and be:

1. Significant: True, accurate, and clear.
2. Complete.
3. Economical: Benefits should outweigh the costs.
4. Timely: This relates to the principle of realization.

Financial Statements

• Balance Sheet: Presents the financial situation.
• Income Statement: Presents results, with expenditures detailed by function (abridged or detailed).
• Cash Flow Statement: Shows cash inflows and outflows.
• Statement of Changes in Equity: Details changes in equity.
• Notes to the Financial Statements: Provide additional explanations.

Users of Accounting Information

1. Internal Users: Managers, employees.
2. External Users: Tax authorities, banks, municipalities, customers, suppliers.

Accounting is dependent on an entity and keeps track of every registered movement made by the entity.

Measuring the Performance of an Entity

The performance of an entity is measured through its costs and revenues. These are obtained through purchases (costs) and sales (revenues). The profit or loss is determined by comparing revenues and costs over a financial year (1 year).

The accounting period is 1 year. Journal entries facilitate accounting for this period.

Assets, Liabilities, and Equity

• Assets: What the entity owns.
• Liabilities: What the entity owes to others and to the owners.
• Equity: Debt to the owners (not required).
• Debt to Third Parties: Outstanding debt.

Types of Assets

1. Current Assets: Intended to be sold quickly (accounts receivable, inventory, cash, bank).
2. Fixed Assets: Not intended for sale (furniture, machinery).
3. Other Assets: Intangible (not visible but recoverable, such as brand rights, patents).

Types of Liabilities

1. Current Liabilities: Suppliers, accounts payable, short-term loans.
2. Long-Term Liabilities: Mortgage loans, bonds, long-term loans (exceeding one year).
3. Equity: Paid-in capital, retained earnings, current year's profit, reserves.

The result of the period is measured by the variation of assets and liabilities. This is useful when liabilities are greater than assets.

Accounting Equation: Assets = Liabilities + Equity

Equity = Assets - Liabilities

Accounts Receivable

Accounts receivable is the name that represents a set of elements with a similar function that may have variations over time.

• Debit Balance: Debits are greater than credits.
• Credit Balance: Credits are greater than debits.
• Zero Balance: Debits equal credits.

Chart of Accounts

Chart of Accounts: A list of all ledger accounts used by the entity.

Account Manual: A document that indicates the classification and usage of accounts.

Journal Entries

The Journal is a chronological and ordered record of all transactions made by the entity. Records are carried out through journal entries, where one account is debited and another is credited.

Types of Journal Entries

• Simple Entry: Involves two accounts, one debit and one credit.
• Compound Entry: Involves more than two accounts.

Ledger

The Ledger is a summary of all accounts involved in accounting, with their respective debit and credit entries. At the end of each period, the balance of each account should be obtained by comparing the total debits to the total credits. The balances of each account, in an orderly fashion, will allow us to obtain the financial statements.