Accounting Framework: Annual Accounts, Principles & Elements

Posted on Jan 26, 2025 in Economy

Conceptual Framework of Accounting: Annual Accounts

The annual accounts include: the balance sheet, the profit and loss account, statement of changes in equity, and a memory in SMEs. Annual accounts show a true and fair view of assets, financial position, and results of the company.

Requirements for Information in Annual Accounts

The information contained in the annual accounts must be true and relevant. Information is reliable when it is free of errors and must be integrated. The information must comply with the qualities of accounting.

Accounting Principles

  • Going Concern: It is considered that the company has an unlimited duration.
  • Accrual: Economic facts are recorded when revenue and expenditure occur, regardless of the date of payment.
  • Uniformity: Maintain consistency in decisions and reasoning.
  • Prudence: Be prudent in decisions and assessments under uncertainty. Only profits are counted until the closing date of the exercise.
  • No Compensation: Losses of assets and liabilities, and income or expenses, may not be compensated.
  • Materiality: Strict application of accounting principles is not required when the impact is insignificant. In case of conflict, the principle most conducive to a true picture prevails.

Elements of the Annual Accounts

Balance Sheet Elements:

  • Assets: Property, rights, and other countable resources economically controlled by the company.
  • Liabilities: Current liabilities resulting from past events.
  • Equity: The residual assets of the company after deducting all its liabilities.

Income and Spending Elements:

  • Revenue: Increase in equity of the company during the year, whether in the form of inflows or increases in the value of assets or decrease in liabilities.
  • Expenses: Decrease in net profit during the exercise, whether in the form of outflows or decreases in asset values.

Registration Criteria:

  • Assets: When they are likely to provide future benefits.
  • Liabilities: When resources are expected to be delivered in the future.
  • Revenue: When the resources of the company increase.
  • Expenses: When the resources of the company decrease.

Functions of the ICAC

  • Performing technical work related to the PGC (General Accounting Plan), its adaptation to EU regulations, and laws governing these matters.
  • Issuing standards for the development of the PGC and its adaptations, when necessary.
  • Improving accounting planning.
  • Conducting research, study, dissemination, and publication of documentation to develop accounting standards.
  • Coordinating technical accounting matters with international agencies.
  • Sectoral adjustments are made by the ICAC and approved by the government. Some sectors with adaptations include real estate, construction, sports federations, industry, sports clubs, and construction companies.

Scope of Application of PGC for SMEs

This PGC for SMEs may be applied by all companies, regardless of their legal form, individual or corporate, that for two consecutive years meet at least two of the following three criteria:

  1. Total asset losses not exceeding 2,850,000.
  2. Net annual turnover not exceeding 5,700,000.
  3. Average number of employees not exceeding 50.

This PGC for SMEs cannot be applied by companies that:

  1. Have issued shares for trading on regulated markets in any EU member state.
  2. Are part of a group of companies.
  3. Have a usual currency that is different.

The holding company option to continue with this plan shall be maintained during the exercise.

Valuation Endpoints:

  • Historical cost or cost.
  • Fair value.
  • Net realizable value.
  • Present value.
  • Value in use.
  • Cost of sales.
  • Amortized cost.
  • Transaction cost attributed to an asset or financial liability.
  • Accounting or book value.
  • Residual value.