Understanding Accounting Standards and Financial Concepts

Accounting Standards

One of the objectives of Financial Accounting is to prepare financial statements for external users. Since this information, prepared by companies, significantly influences the decisions of users, it has been considered necessary to normalize the principles and rules used in its preparation. Accounting standards ensure that the accounting information disclosed complies with minimum standards of quantity and quality, setting quality requirements, the format to be disseminated, and the principles and rules of valuation to be used.

Spanish accounting standards are primarily contained in business law (Commercial Code, Corporations Law, etc.). The General Accounting Plan 2007 and the General Plan Small Business Accounting 2007 further develop commercial accounting legislation and are mandatory for all companies regardless of their legal form, individual or corporate.

The General Accounting Plan is divided into five parts, preceded by an introduction:

1. Framework
2. Accounting policies and valuation
3. Annual Accounts
4. Chart of accounts
5. Definition and accounting relationships

Self-Financing

Internal self-financing (own): The financial surplus generated as a result of the company's activity and retained within it. This provides the company with autonomy, as retaining profits allows for reinvestment in the business.

Types of Self-Financing:

1. Maintenance: The objective is to maintain the productive capacity of the company, reflected in the accounts for depreciation and amortization.
2. Expansion: Aims to achieve expansion and growth of the company, reflected in the reserve accounts and balances.

The components are the resources generated by the company. Retained earnings are the excess of business revenue once all factors of production have been paid.

Cost of Capital

The price or cost that the company has to pay for financial resources used in its business. The expression refers to the weighted average cost of the various sources of business financing.

Financial Returns

Total return provided by the company as an investment project, expressing the profitability of financial capital owners, because it is calculated from the net or residual benefit paid after all other factors of production, including funds from outside contributors.

Financial Leverage

Occurs as a result of the cost differential between the capital debt and equity. It evaluates the effect of finance costs on profits.

Investing

Changing instant gratification for a future benefit, which is waived against the hope that it is acquired and that the support is well spent.