Accounting Principles and Financial Statements

Posted on Nov 29, 2024 in Economy

Accounting: Economic and Financial Decisions

Accounting is a tool for economic and financial decisions, requiring adherence to specific standards. It involves recording financial data, measuring comparative management, and analyzing information to facilitate informed decision-making.

Financial vs. Economic

Financial: How a business is funded.

Economic: How assets are utilized.

Key Accounting Concepts

Economic Events: Transactions affecting a company’s financial position, quantifiable and documented.

Quantify: Measuring, calculating, and counting financial data.

Assets: Resources owned by a company with the potential to generate cash (e.g., brand assets).

Liabilities: Debts owed by a company.

Capital: Assets, rights, and obligations constituting a company’s economic means (goods, rights, obligations, partner contributions).

Equity: Owner’s capital, calculated as assets minus liabilities.

Outcome: Change in equity, reflecting financial performance.

Types of Assets

Current Assets: Short-term investments (e.g., cash, accounts receivable, inventory).

Fixed Assets: Long-term investments in infrastructure (e.g., equipment, land, buildings).

Other Assets: Investments not directly related to core business operations.

Company Liabilities

Liabilities: Short-term financial obligations.

Long-Term Liabilities: Financing sources with maturity over one year.

Shareholders’ Equity

Capital: Remaining assets after settling liabilities.

Financial Statements

Financial statements provide information for decision-making, including the balance sheet, income statement, and cash flow statement.

What is Accounting?

Accounting is the art of recording, interpreting, summarizing, and analyzing economic activity in monetary terms.

Accounting Events

Accounting systems systematically record daily business transactions in monetary terms, representing accounting events.

Function and Objective

Function: Chronologically record economic facts and provide financial information.

Objective: Provide financial information to internal and external users (e.g., banks, shareholders, creditors) according to Generally Accepted Accounting Principles (GAAP).

Generally Accepted Accounting Principles (GAAP)

GAAP includes conventions, rules, and procedures constituting accepted accounting practices.

Common GAAP Principles:

  • Equity: Equal treatment for competing interests.
  • Accounting Authority: Companies are separate entities from their owners.
  • Going Concern: Presumption of indefinite operational continuity.
  • Economic Goods: Financial statements refer to monetarily valued events and resources.
  • Currency: Accounting is measured in monetary terms.
  • Time Period: Financial statements summarize information over specific periods.
  • Accrual: Recognizing revenues and expenses when incurred, regardless of payment.
  • Performance: Accrual concept applied to operations, considering risks.
  • Historical Cost: Transactions recorded at original cost.
  • Objectivity: Changes in assets or liabilities are recorded when objectively measurable.
  • Consistency: Uniform application of accounting procedures.
  • Disclosure: Comprehensive information in financial statements.

The Accounting Equation

Assets = Liabilities + Equity

This equation reflects the balance sheet’s fundamental principle.

Principal Accounting Reports

Balance Sheet: Reflects a company’s assets, liabilities, and equity at a specific time.

Income Statement: Shows a company’s financial performance over a period.

Accounting Information Users

Internal Users: Managers, executives, operational staff, and owners.

External Users: Customers, suppliers, banks, financial institutions, and regulatory agencies.

Accounting as a Basis for Decisions

Accounting measures a company’s value and solvency, providing information for business decisions.

Basic Requirements of Accounting Information:

  • Significant: True and reflective of economic reality.
  • Complete: Comprehensive and without omissions.
  • Economic: Cost-effective to provide.
  • Timely: Available when needed.

Accounting Standards and Principles

  • GAAP: Generally Accepted Accounting Principles.
  • SVS: Regulates market and financial information.
  • Super S.: Oversees public company financials and audits.
  • IFRS: International Financial Reporting Standards.

Most Relevant Accounting Principles:

  • Currency: Accounting records in local currency.
  • Historical Cost: Recording transactions at original cost.
  • Economic Entity: Identifiable unit engaged in economic activities.
  • Association or Correspondence: Matching revenues and expenses.
  • Consistency: Uniform application of accounting methods.
  • Conservative Approach: Avoiding overstatement of assets or income.
  • Completion and Due: Recognizing revenues and expenses when earned or incurred.
  • Accrual: Recognizing economic changes when they occur.

Balance Equation and Types of Companies

Balance Equation: Assets = Liabilities + Equity

Types of Companies: Individual, Limited Liability (Ltda), Limited Responsibility (EIRL), Free Capital (SAP, SAC, SAA).