Understanding Companies and Accounting Cycles

Understanding Companies

What is a Company?

A company is a legal entity made up of an association of persons, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise.

Types of Companies by Economic Sector

• Commercial Companies: Dedicated to buying and selling goods.
• Industrial Companies: Dedicated to producing goods.
• Agricultural Companies: Dedicated to cultivating and raising livestock.
• Extracting Companies: Dedicated to the extraction of riches from the earth.
• Service Companies: Dedicated to offering services.

Types of Companies by Size

• Small Companies: Companies with no more than 20 workers. Examples include grocery stores, restaurants, and bakeries.
• Medium Companies: Companies with less than 100 workers. These are specialized in more specific markets.
• Large Companies: Companies formed with more than 100 workers. They manage significant resources for production, commerce, or services.

Accounting Cycle and Principles

What is an Accounting Cycle?

A accounting cycle is a set of steps applied in the accounting of a company.

Principles and Ethics Code of an Accountant

• Integrity: The accountant must be upright in all their actions. It is not allowed to make any act that could discredit their profession.
• Discretion: All information managed by accountants must be kept strictly private. This information cannot be spread to anybody; it must be private and confidential.
• Objectivity: When the accountant produces information, it must be objective, based on real facts, and supported by evidence.

Steps in the Accounting Cycle

1. Collect and analyze data.
2. Record transactions.
3. Post to the general ledger.
4. Prepare an unadjusted trial balance.
5. Prepare adjusting entries.
6. Prepare an adjusted trial balance.
7. Close the accounts.
8. Prepare and present financial statements.

Key Accounting Principles and Guidelines

• Monetary Unit: Establishes which monetary unit will be used in the financial statements of the companies (e.g., euros, dollars).
• Going Concern: Assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the future.
• GAAP: Generally Accepted Accounting Principles are a set of rules and principles that are globally accepted for financial reporting.
• IASB: The International Accounting Standards Board is the organization that designs and establishes international accounting standards.

Elements of a Company

• Merchant
• Worker
• Technology
• Provider