Accounting Principles and Practices
Objectivity
Changes in assets, liabilities, and equity are to be booked as soon as possible to objectively measure these changes.
Prudential Criteria
The measurement of resources and accounting obligations requires incorporating estimates to distribute costs, expenses, and revenues over relatively short periods and between different activities. Preparing financial statements requires a prudent approach when selecting the basis for decisions. This involves choosing the most conservative option among two or more alternatives.
Significance or Relative Importance
Common sense is essential when applying accounting principles and rules. Situations may arise that don’t perfectly align with these principles and rules, but they don’t present problems if they don’t distort the overall financial statements. The best approach is to consider each case individually, factoring in the impact on assets, liabilities, equity, and the results of operations for the accounting period.
Uniformity
Quantification procedures must be consistently applied from one period to another. Justified changes in procedures should be disclosed, along with their effects. This ensures that financial statements maintain the same structure across accounting periods, enabling comparison and informed decision-making by users.
Substance Over Form
Accounting prioritizes the economic substance of events, even if legal treatment differs.
Economic Duality
The structure of accounting rests on this principle, encompassing:
- Resources available for achieving objectives
- The sources of these resources, reflecting liabilities incurred.
This is fundamental for recording economic events within an enterprise, specifically the concepts of debit and credit.
Relationship Between Financial Statements
The accounting process culminates in a balance sheet and an income statement, which are complementary. This principle involves comparing assets with liabilities to obtain a result that should equal the result obtained by comparing profit and loss accounts.
Disclosure
Financial statements must contain all essential information for proper interpretation of the entity’s financial and economic performance. Accounting has clear provisions for presenting information, such as the balance sheet, income statement, and cash flow statement.
Chart of Accounts
When preparing a chart of accounts, define the following:
- Account Names
- Account Descriptions
- Account Types
- Account Codes
Consider these factors:
- Company Activity
- Types of Transactions
- Necessary Controls
- Required Information Characteristics
- Tax and Legal Requirements
Accounts Manual
Cash Account (Asset): Records cash inflows and outflows.
Bank Account (Asset): Records deposits, bank credits, and check payments.
Merchandise Inventory (Asset): Records purchased and sold goods.
Accounts Payable (Liability): Records debts incurred and payments made.
Accounting Process
Commercial Transactions: Occur when an economic event affects the company’s accounts.
Trade Documents: Support the accounts (e.g., sales slips, tax forms, invoices).
Business Documents
Invoices: Formalize purchase and sale transactions.
Credit Notes: Reduce the amount of an invoice (e.g., refunds, discounts).
Debit Notes: Increase the amount of an invoice (e.g., adjustments, interest).
Accounting Vouchers: Forms used to record transactions and their corresponding debits and credits.
Accounting Books: Official records required by the SII, centralizing all transactions for a given year.
Accounting Reports: Summarize the company’s financial position at a specific date.