Accounting Principles and Practices

Posted on Sep 17, 2024 in Economy

Accounts

Definition

Accounts can be defined as the set of homogeneous economic facts and acts properly quantified. It is significant that the entire accounting system moves on the basis of accounts.

Components of an Account

The accounts consist of:

  • Subject: A person in respect of which the thing is considered.
  • Property: Tangible or intangible element which is of economic fact.
  • Value: The numerical expression of this economic fact.

Representation of an Account

We can represent an account with a T-account that has two parts:

  • Left (Debit): Records increases in assets and expenses, and decreases in liabilities and equity.
  • Right (Credit): Records increases in liabilities and equity, and decreases in assets and expenses.

When we record a transaction, we should debit the account that receives value and credit the account that provides value. When the total debits are greater than the total credits, the account has a debit balance. When the total credits are greater than the total debits, the account has a credit balance.

Classification of Accounts

Accounts can be classified by:

  • Nature: Asset, Liability, Equity, Revenue, Expense.
  • Property: Real, Personal.

Types of Accounts

Asset Accounts

Active Asset: Represent positive aspects of heritage. The increases are recorded in the debit and the declines in the credit. They are called asset accounts.

Liability Accounts

Passive Heritage: They represent negative aspects of heritage. The increases are recorded on the credit and decreases on the debit. They are known as liability accounts.

Equity Accounts

Net Assets/Equity: Represent members’ rights over the asset. The increases are recorded on the credit and decreases on the debit. They are called net worth accounts.

Income Statement Accounts

Income Statement: Reflects gains or losses that eventually result in an increase or decrease in the net worth of the company.

Loss Accounts: Represent a decrease in equity. Losses are recorded on the debit and always have a debit balance.

Profit Accounts: Represent an increase in equity. Gains are recorded on the credit and always have a credit balance.

Accounts by Content

Analytical or Simple: These are accounts that correspond to similar features and overall shape of a particular item. They can have a debit or credit balance.

Kinetic or Group: Those that group a certain amount of analytical accounts with homogeneous characteristics. They can have a debit or credit balance.

Accounting Equations

Basic Accounting Equation

Assets – Liabilities = Equity

Heritage is the set of assets belonging to a person. Equity is the difference between positive and negative aspects of heritage.

Dynamic Equation

Assets – Liabilities = Capital + Profit – Loss

Static Equation

The following contributions can be made by the owners:

  • Cash
  • Other assets
  • A combination of both
  • Debt

Cash Contributions

Assets – Liabilities = Net Worth

Variations in Economic Facts

Economic Variations

Economic changes are recorded through the double-entry system.

Neutral Variations

Economic variations that are called neutral operations vary qualitatively in heritage, that is, in the quality of its components without affecting the quantity.

Modifying Variations

Modifying Property-Variations: They vary in equity in quantitative terms. Economic facts must occur to generate results.

Modifying Positive-Variations: These are positive changes, such as interest earned on cash.

Modifying Negative-Variations: These are negative changes, such as ongoing expenses like salaries and rent.

Mixed Heritage Variations

These variations affect heritage both qualitatively and quantitatively. Examples include investments, debts, etc.

Analysis of Accounts

When analyzing an account, consider the following:

  • What does the account represent?
  • What is its balance (debit or credit)?
  • When is it debited?
  • When is it credited?

Specific Asset Accounts

Banks and Cash

  • Box: Cash accounts.
  • Balance: Debit.
  • Is debited: When money enters the company, either by selling goods or services, collection of rent, interest, etc.
  • Is credited: When a payment is made by cash or bank transfer.

Deposit Securities

  • Represents: Checks received as payment for certain operations. These checks are to be collected until the deposit.
  • Balance: Debit.
  • Is debited: To receive checks as payment instruments for certain operations.
  • Is credited: To make the deposit of checks in the bank, endorsement and delivery as payment to suppliers, etc.

XX-Bank Account

  • Represents: Funds held by the company’s checking account.
  • Balance: Debit.
  • Is debited: When funds are deposited in the current account or when the bank made a domestic credit.
  • Is credited: When issuing checks against the current account or when the bank made a domestic debit.

Fixed-Fund

  • Represents: Funds that the company intends to meet expenses of less quantity.
  • Balance: Debit.
  • Is debited: To establish a fixed fund and recover the balance.
  • Is credited: To record the payments made from the fixed fund.

Foreign Currency

  • Represents: Funds available in foreign currency held by the company.
  • Balance: Debit.
  • Is debited: To enter foreign currency assets.
  • Is credited: To deliver the foreign currency as payment, for example, to a foreign supplier.

XX-Savings Banks

  • Represents: Funds deposited in a bank in the form of savings.
  • Balance: Debit.
  • Is debited: When making bank deposits and when you make any domestic credit (interest accrued).
  • Is credited: When making withdrawals from savings and when the bank made a domestic debit.

Listed Shares

  • Represents: The investment in shares of a publicly traded company.
  • Balance: Debit.
  • Is debited: To acquire the shares, valued at cost.
  • Is credited: When the shares are sold, in whole or in part.

Credits

Sales-Debtors

  • Represents: All those current account balances held by the company on the purchase of goods.
  • Balance: Debit.
  • Is debited: For sales of goods or services on current account.
  • Is credited:
    • When debtors cancel all or part of their debt.
    • When a debtor is considered delinquent (for having exceeded the time limit for payment) or is under default management.
    • When a debtor’s account is considered doubtful.

Delinquent Debtors

  • Represents: Debtors who have exceeded the payment period determined in advance by the company.
  • Balance: Debit.
  • Is debited: When a debtor of the company (e.g., sales debtors) has exceeded the time limit to pay the debt and is in default.
  • Is credited:
    • To cancel all or part of their debt.
    • To transfer the debtor to management.
    • To consider the account as doubtful.

Debtor Judicial Management

  • Represents: Debtors of the company for which a trial has been initiated in order to collect the respective credit.
  • Balance: Debit.
  • Is debited: At the start of the trial against the relevant debtor or a defaulting debtor.
  • Is credited:
    • To collect full or partial credit.
    • To consider the account as bad debt due to an adverse outcome of the trial.

Notes Receivable

  • Represents: Credit documented with a certain date that the company has.
  • Balance: Debit.
  • Is debited: When receiving a document through payment of sales, loans, etc.
  • Is credited:
    • Upon cancellation of the document.
    • When a trial is started against the debtor.
    • When the note is considered uncollectible.
    • By discounting the document to a bank or financial institution.

Real Exchange

Resale-Merchandise

  • Represents: Merchandise of the company to be marketed.
  • Balance: Debit.
  • Is debited:
    • By acquiring goods.
    • For returns of goods sold.
    • To deliver on consignment.

Raw Materials

  • Represents: Raw materials held by the company in order to incorporate them into the process of marketing. The property is the usual operating stock.
  • Balance: Debit.
  • Is debited: For the purchase of raw materials and year-end adjustments for inventory differences.
  • Is credited: When raw materials are incorporated into the production process, at the end of the fiscal year before adjustments for inventory differences and reimbursement of purchases.

In Process

  • Represents: Goods that are under development and include the costs of raw materials, labor, and processing costs.
  • Balance: Debit.
  • Is debited: When computing the raw materials, labor, and manufacturing costs in the production process.
  • Is credited: When goods become finished products.

Finished Products

  • Represents: Products that have completed the production cycle and are ready for marketing.
  • Balance: Debit.
  • Is debited:
    • When products in process are transformed into finished products, completing the production cycle.
    • For sales returns.
    • By year-end adjustments for inventory differences.
  • Is credited:
    • When products are sold.
    • By year-end adjustments for inventory differences.
    • To deliver on consignment.

Purchases

  • Represents: Purchases of goods reflected during the year when the company uses the inventory difference method to value their stock.
  • Balance: Debit.
  • Is debited: For purchased goods.
  • Is credited: At the close of the period, against the goods account.

Use of Goods

Represents goods that are used in the business of the company, whose useful life exceeds one year and are not for sale.

Buildings

  • Represents: Buildings that the company has for commercial exploitation.
  • Balance: Debit.
  • Is debited: When the property is purchased, for increased cost on account of improvements made, or by application of accounting revaluation.
  • Is credited: To sell the property or due to the total or partial destruction of the building.

Land

  • Represents: Land that the company has for commercial exploitation.
  • Balance: Debit.
  • Is debited: To acquire the property, by increasing its cost due to improvements.
  • Is credited: To sell the land.

Rolled

  • Represents: Boulders belonging to the company.
  • Balance: Debit.
  • Is debited: To acquire the property, to increase its cost because of improvements made or revalued by application of accounting.
  • Is credited: To sell the property or due to the total or partial destruction of the boulders.

Machinery

  • Represents: Machinery used in normal operation.
  • Is debited: To acquire the asset, for the cost increased because of improvements made.

Useful Furniture and Facilities

  • Represents: Office equipment and controls used by the company.
  • Balance: Debit.
  • Is debited: To acquire the asset or by application of accounting revaluation.
  • Is credited: For the sale of the property or due to total or partial destruction.

Debts

Debts are certain obligations, determined or determinable.

Providers

  • Represents: Acquisition debts for goods or services purchased in the ordinary course of business.
  • Balance: Credit.
  • Is credited: For purchases of goods made on current account.
  • Is debited:
    • To settle the obligation in whole or in part.
    • When the debt is documented.

Notes Payable

Represents debts documented with a certain date that the company has.

Documents to be Paid

  • Represents: All those documentary debts to date that a company has.
  • Balance: Credit.
  • Is credited: To issue documents as payment for purchases made, or by borrowing for a concept with similar characteristics.
  • Is debited: To cancel the document.

Sundry Creditors

  • Represents: Creditors of the company for other items that do not correspond to the provision of goods, materials, or services, whose amount is not very significant.
  • Balance: Credit.
  • Is credited: At the birth of the obligation (loan).
  • Is debited:
    • To cancel all or part of the debt.
    • By documenting the debt.

Equity

Equity results from the excess of assets over liabilities and represents rights over economic resources.

Subscribed Capital

Meets conditions required by law 19,550 according to the legal classification of the company (equity, capital, etc.).

Reserved-Earnings

Retained earnings at the company by the express will of social or legal provision.

Results Unallocated

Represents profit or loss without allocation.

Reserves

It is a true extension of the share capital. Company profits are retained for distribution.

Losses

Losses impact equity downwards.

Cost of Goods Sold

  • Represents: The cost of the merchandise that has been marketed on the basis of normal operations.
  • Balance: Debit.
  • Is debited: To record the cost of goods sold.
  • Is credited: To adjust for sales returns already made.

Sales Returns

  • Represents: Returns of goods previously sold to clients.
  • Balance: Debit.
  • Is debited: To receive returned goods for various reasons.
  • Is credited: Not typically credited.

Doubtful Accounts

  • Represents: Accounts that the company estimates, based on several factors, will not be paid.
  • Balance: Debit.
  • Is debited:
    • To establish the allowance for doubtful accounts.
    • When an account becomes uncollectible and there is no established allowance.
    • When an account becomes uncollectible and the established allowance is not enough.

Interest-Propagated

  • Represents: Disbursements made and earned in the year in respect of interest.
  • Balance: Debit.
  • Is debited: For interest paid.
  • Is credited: Not typically credited.

Interest Paid

  • Represents: Expenditures for rent.
  • Balance: Debit.
  • Is debited: For rent paid.
  • Is credited: Not typically credited.

Salary

  • Represents: Remuneration paid to the company staff.
  • Balance: Can be debit or credit.
  • Is debited: To accrue salary expense.
  • Is credited: Usually not credited.

Publicity and Advertising Costs

  • Represents: Costs incurred for publicity and advertising.
  • Balance: Debit.
  • Is debited: To record advertising costs.
  • Is credited: Not typically credited.

Profits

Profits are gains that affect the company’s net assets by increasing them.

Sales

  • Represents: Merchandise that has been sold by the enterprise.
  • Balance: Credit.
  • Is credited: To record sales of goods.
  • Is debited: Not typically debited.

Discounts Obtained

  • Represents: Discounts received by the company for prompt payment or cash payment.
  • Balance: Credit.
  • Is credited: To record a discount received.
  • Is debited: Usually not debited.