Accounting Principles and Practices

Posted on Apr 27, 2024 in Economy

Accounting Schools of Thought

Contista School (French)

Originated in France and created by Desgranges, this school focuses on a basic accounting system with five accounts: cash, goods, commercial receivables/payables, and outcome. It utilizes the Journal-Mayor procedure and emphasizes the principle of debiting the receiving account and crediting the delivering account.

Personalista School (Italian)

With roots in the work of Marchi and Cerboni, this school is based on the theory of account embodiment. Accounts are opened for people and personified material elements, establishing a legalistic approach to accounting with an emphasis on security against third parties.

Materialistic School (Economic)

Also known as the economic school, with precursors like Fabio Besta, this school introduces the concept of economic value and emphasizes the economic approach to accounting. Accounts track changes in asset values and serve the purpose of knowledge and control within the company.

French Doctrine

Dumarchay’s theory of differential values is central to this doctrine, considering accounts as tools to capture the value of economic events. It utilizes both integral and differential accounts and emphasizes the static balance theory, prioritizing the balance sheet over the income statement.

German Doctrine

This doctrine also takes an economic approach, viewing accounting as an information science for economic phenomena within a company. Key figures include Schmalenbach, who proposed the dynamo theory of balance (prioritizing the income statement) and the concept of an accounts plan, and Schneider, who contributed significantly to cost accounting and defined fundamental magnitudes like purchase, expenditure, consumption, cost, sales, and income.

Spanish Doctrine

Initially influenced by the contista trend, the Spanish doctrine later shifted towards a mathematical orientation and eventually adopted a more practical and teaching-oriented approach. Professor Fdez Pirla’s “Tª Economic Accounting” provided a deep economic analysis of accounting. Currently, the Spanish doctrine exhibits a formal tone influenced by U.S. accounting principles.

Interpretations of Accounting

Three main interpretations of accounting exist:

  • Legalistic Interpretation: Views accounts as collateral against third parties, as emphasized by the Personalista School.
  • Economic Interpretation: Considers accounting as a tool for understanding and controlling the business, with proponents like Besta and Schneider.
  • Formal Interpretation: Focuses on defining accounting concepts with a formalized language, starting with Schneider and culminating with Mattessich. This is the currently prevailing approach.

Scientific Accounting: Object and End

Accounting is an empirical, economic, and social science concerned with economic reality. Its object is to gain qualitative and quantitative knowledge of this reality, with the aim of determining the economic unit’s situation and its evolution over time. Modern interpretations view accounting as an information science focused on capturing, processing, and disseminating information.

Accounting Relationships with Other Sciences

Accounting has various relationships with other sciences:

  • Essential Relationships: Shared material object, such as with Economics, Business Economics, and Law.
  • Formal Relationships: One science supports and influences the others, like Law’s influence on accounting through legislation.
  • Instrumental Relationships: One science serves as a tool for others, such as Mathematics, Statistics, and Computer Science in accounting.
  • Teleological Relationships: One science serves others, like accounting serving Commercial Law and Business Economics.

Company Accounts and Inventory

Definition of Company Accounts

Company accounts represent the applied branch of accounting focused on micro-economic units, providing qualitative and quantitative knowledge of their economic reality to understand their status and evolution.

Definition of Inventory

An inventory is a detailed and valued list of all assets, rights, and obligations comprising a company’s heritage. It serves as a fundamental accounting tool.

Inventory Classes

Inventories can be classified based on various criteria:

  • Nature: Required (imposed by authorities) or Voluntary (for company convenience).
  • Extent: Total (all assets) or Partial (specific portion of assets, rights, or obligations).
  • Source of Information: Accounting (from accounting data) or Extra-accounting (from direct measurement).
  • Timing: Initial/Opening, Development, or Final/Closing.

Inventorying Phases

The inventorying process involves several phases: uptake, grouping and symbolization, measurement and valuation, classification and ordering, summation, and fulfillment.

Inventory Principles

Key inventory principles include:

  • Specialization of the Exercise: Attributing income and expenses to the period they correspond to, regardless of collection or payment timing.
  • Prudence: Choosing the lower valuation between options and recognizing losses even if they are mere expectations.
  • Consistency: Maintaining consistent valuation methods over time to avoid artificial gains or losses.
  • Updating the Assessment: Considering current values and the element’s role in the company.

Formal Structure of the Inventory

An inventory typically has three parts:

  • Head: Identifies the inventory number, date, name, and reason.
  • Body: Details and values assets and liabilities, presenting the net worth.
  • Feet: Certification signed by the employer, outlining the inventory’s consequences.

Groups of Accounting Events

Classical Interpretation

Focuses on the company’s net worth and classifies events as permutations (no quantitative change in net worth), modifications (affecting net worth quantitatively), or mixed.

Economic Interpretation

Focuses on the economic and financial structures of the company, classifying events as permutations (no quantitative change in structures), modifications (altering structures quantitatively), or mixed.

Laws of Accounts

Three fundamental laws govern accounts:

  • Law of Breakdown: An event is broken down into its components.
  • Law of Integration: Components are integrated into a single event.
  • Law of Connection: Events are connected to form a complete picture.

Classes of Accounts

Two main classes of accounts exist:

  • Comprehensive Accounts: Capture and represent company assets and their value changes, including asset and liability accounts.
  • Differential Accounts: Capture differences in net worth resulting from accounting events.

Accounts Procedures

Two primary procedures are used for accounts:

  • Administrative Procedure: Accounts are charged and paid at acquisition, with the balance representing stocks. Uses comprehensive accounts.
  • Speculative Procedure: Accounts are charged at purchase price and paid at selling price, with the balance reflecting gains or losses. Uses both integral and differential accounts and requires regularization at the end of the period.

Definition and Types of Balance

A balance is a conceptual tool representing the overall business situation at a given time. It provides a valued relationship of assets and liabilities but lacks detailed information. Different types of balances exist, including balance of sums, trial balance, inventory balance, and balance sheet.

Magnitudes: Current and Fund

Current Magnitudes (Flows)

These magnitudes represent the movement of resources within and outside the company:

  • External: Purchase, Expenditure, Sale, Income
  • Internal: Consumption, Cost, Production, Cost of Production, Production Placed, Cost of Sales

Fund Magnitudes (Stocks)

These magnitudes represent the resources held by the company at a specific point in time:

  • External: Available funds, Economic investments, Financial fixed assets, Deferred payments, Financial investments
  • Internal: Production in progress, Finished goods stock, Cost of production

Period of Maturity Medium (PMM)

PMM is the average time it takes for a monetary unit to be invested and recovered. It consists of four sub-periods: storage, manufacturing, sale, and collection.

Working Capital

Working capital is the difference between current assets and current liabilities, representing the portion of assets financed by long-term liabilities and net worth.

Types of Magnitudes

Magnitudes can be classified as:

  • Simple Variables: Directly measurable, such as mass or length.
  • Composite Variables: Derived from two or more simple or composite figures, expressing a relationship between them.

Scale Classes and Proceedings

Scale Classes (Stevens)

  • Nominal Scale
  • Ordinal Scale
  • Interval Scale
  • Ratio Scale

Scale Proceedings (Ellis)

  • Direct Measurement
  • Indirect Measurement (Elementary or Fundamental, Derived or Trust)

Analytical and Synthetic Assessment

Analytical Assessment

Values the company as a sum of its parts, evaluating each part independently.

Synthetic Assessment

Values the company as a whole, considering the synergy between its parts and the resulting goodwill.

Goodwill

Goodwill is the difference between the synthetic and analytical assessment, representing an intangible asset.

Basic Principles of Analytical Assay

Pantaleoni’s principle states that any assessment must have a purpose, and the quantitative level of assessment depends on that purpose.

Valuation Endpoints

Various endpoints can be used for valuation:

  • Historical Cost: Purchase price or production cost.
  • Fair Value: Amount for exchange between informed parties.
  • Net Realizable Value: Expected selling price minus costs.
  • Current Value: Present value of expected cash flows.
  • Value in Use: Present value of expected cash flows from asset use.
  • Cost of Sales: Amortized amount of an asset or liability.
  • Book Value: Value recorded in the accounting books.
  • Residual Value: Estimated selling price after depreciation.

Situations in Relation to Goodwill

The relationship between synthetic value (VS) and analytical value (VA) indicates the company’s economic capitalization:

  • Positive Goodwill (VS > VA): Economic overcapitalization.
  • Null Goodwill (VS = VA): Normal economic capitalization.
  • Negative Goodwill (VS < VA): Undercapitalization, no economic capitalization, or economic disinvestment, depending on the economic growth rate.

Criteria for Measuring Goodwill

Goodwill can be measured using direct methods (comparing profits) or indirect methods (comparing synthetic and analytical values).

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