Mastering the Chart of Accounts: EU Standards & Structure

Understanding the Chart of Accounts

The Chart of Accounts is a fundamental framework born from the normalization of accounting practices. This standardization aims to establish consistent criteria for companies, enabling homogeneous, reasonable, and valid comparisons across different periods and entities.

EU Directives for Accounting Normalization

The European Union (EU) has issued a set of rules to implement accounting normalization in its participating countries. These directives are crucial for harmonizing financial reporting:

• The Fourth Directive: Also known as the European Accounting Plan, this directive establishes the financial information that corporate accounting should provide.
• The Seventh Directive: This directive sets the requirements for developing financial information related to corporate groups.

Structure of the Chart of Accounts

Both the European Accounting Plan and the national Chart of Accounts are typically structured into five main parts, preceded by an introduction. The first three parts are mandatory, while parts IV and V are proposals that companies can choose to apply.

Mandatory Application: The General Chart of Accounts (PGC) is mandatory for all companies, regardless of their legal form, unless they voluntarily qualify for the PGC for Small and Medium-sized Enterprises (SMEs).

I. Conceptual Framework of Accounting

This section comprises a set of foundational principles and basic concepts. Adherence to these principles leads to a logical, deductive process for the recognition and measurement of items within the annual accounts. It determines what annual accounts businesses must develop and the accounting requirements they must meet. The accounting information provided is mandatory and intended to present an accurate picture of the company's financial position.

Valuation Principles

Valuation is the process by which a monetary value is assigned to each component of the annual accounts, in accordance with specific valuation rules. Key valuation criteria include:

• Historical Cost: This is the acquisition price or production cost of an asset.
• Fair Value: The amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction.
• Net Realizable Value: The amount a company expects to obtain from the sale of an asset in the market, less the costs of completion and sale.
• Accounting or Book Value: The net amount at which an asset or liability is recorded in the balance sheet.
• Residual Value: The estimated amount that a company could currently obtain from the disposal of an asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.

II. Rules for Registration and Valuation

This section elaborates on the accounting principles and other provisions outlined in the Conceptual Framework of Accounting, providing detailed rules for recording and valuing financial transactions.

III. Annual Accounts

The annual accounts represent a synthesis of the information contained in the accounting records, summarizing the transactions for a specific financial year. They typically include the balance sheet, income statement, statement of changes in equity, cash flow statement, and notes to the financial statements.

IV. Chart of Accounts (Groups)

The Chart of Accounts organizes financial elements into a hierarchical structure, typically comprising groups, subgroups, accounts, and sub-accounts. The standard groups are:

1. Basic Financing: Capital, reserves, long-term debt.
2. Non-Current Assets: Fixed assets, intangible assets, long-term investments.
3. Inventories: Raw materials, work-in-progress, finished goods.
4. Trade and Other Receivables: Debtors from business operations.
5. Financial Accounts: Cash, bank accounts, short-term investments.
6. Purchases and Expenses: Costs incurred in operations.
7. Sales and Income: Revenue generated from operations.
8. Expenses Charged to Equity: Specific expenses affecting equity.
9. Income Credited to Equity: Specific income affecting equity.

Accounts are generally categorized as follows:

• Balance Sheet Accounts: Groups 1-5
• Management Accounts (Income Statement): Groups 6-9

V. Definitions and Accounting Relationships

This final section provides essential definitions and clarifies the technical language used in accounting relationships, facilitating a deeper comprehension of financial statements and transactions.