Basic Accounting Principles, Concepts, and Processes

Posted on Aug 16, 2024 in Economy

Basic Accounting

Accounting is the technical authority of a business that records economic events involving the company with the goal of delivering financial information upon request.

1.1 Accounting Principles

Accounting, as a science that interprets the economic facts of a business and organizes them in the form of accounts for control and presentation, rests on the following principles:

1. Equity: Equity between conflicting interests should be a concern.
2. Commercial Entity: Financial statements relate to specific economic entities that are different from the owner or owners thereof.
3. Going Concern: The assumption that there is no time limit on the operational continuity of the economic entity. Therefore, figures are not reflected in their estimated realizable value. In cases where there is evidence to the contrary, this event shall be recorded along with its effect on the financial situation.
4. Economic Goods: Financial statements relate to events, resources, and financial obligations that can be valued in monetary terms.
5. Currency: Accounting is measured in monetary terms, which allows heterogeneous components to be reduced to a common denominator.
6. Time Period: Financial summary information relates to specific periods of time, which are formed by the normal operating cycle of the entity or other legal requirements.
7. Accrual: The determination of operating results and financial position should take into account all resources and obligations of the period, whether or not these have been collected or paid. In this way, costs and expenses may be properly linked to the respective revenue they generate.
8. Realization: Economic results are to be counted only when performed.
9. Historical Cost: The recording of transactions is based on historical costs (production, purchase, or exchange), except when agreement with other principles justifies applying a different standard (e.g., realizable value).
10. Objectivity: Changes in assets and liabilities must be booked as soon as possible to objectively measure these changes.
11. Prudential Criterion: To make prudent, conservative decisions between two alternatives.
12. Significance or Materiality: Passing situations that were not in the forecast, but whose effect distorts the whole simulator states.
13. Uniformity: Quantification procedures used must be consistently applied from one period to another. Advise if they change.
14. Substance Over Form: Accounting emphasizes how economical events are treated, although legislation may require different treatment.
15. Relationship Between Financial Statements: The results of the accounting process are comprehensively informed by a statement of financial position and a statement of result, both necessarily complementary.
16. Disclosure: The financial statements must contain all the basic and additional information necessary for the proper interpretation of the financial and economic performance of the entity referred to.
17. Objectives of General Financial Information: To serve the common needs of all users. It is also assumed that users are familiar with accounting operations language.
18. Economic Duality: Economic structure rests in:
    
    • Appealing to what is available for achieving the targets set as a goal.
    • The sources of these, which are demonstrative of various liabilities incurred.

1.2 Accounting Equation

ASSETS = LIABILITIES + EQUITY

When the company generates profits:
ASSETS = LIABILITIES + CAPITAL + PROFIT

Where businesses are generating losses:
ASSETS = LIABILITIES + CAPITAL – LOSS

1.3 Accounting Process

DATA PROCESSING → INFORMATION → ECONOMIC FACTS → FINANCIAL STATEMENTS

1.4 Records

MUST HAVE Account name
_________________________________________________________________
Debiting or charging | CREDITS OR FERTILIZER
_________________________________________________________________
TOTAL DEBITS | TOTAL CHARGES OR CREDITS OR FERTILIZER

• IF TOTAL DEBITS > TOTAL CREDITS → ACCOUNT BALANCE IS DEBTOR
• IF TOTAL DEBITS < TOTAL CREDITS → ACCOUNT HAS CREDITS
• IF TOTAL DEBITS = TOTAL CREDITS → BALANCE OR ACCOUNT IS BALANCED

Account Types:

• ACTIVE ACCOUNTS → TO BE INCREASED → AL have decreased
• LIABILITIES ACCOUNTS → TO BE EASED → With the increased
• CAPITAL ACCOUNT → TO BE DECLINING → With the increased
• ACCOUNTS TO BE MISSED ALWAYS
• ACCOUNTS OF PROFITS TO HAVE ALWAYS

1.5 Accounting Process

SEATS ACCOUNTS – MAJOR ACCOUNTS – BALANCE OF CHECKING AND BALANCING → State Operations (economic facts) → Finaciero

1.6 Entries in the Accounts

The basic chronological record of transactions occurring in the Company. In each seat, only the accounts affected by the operation are recorded. All seats are carried in the journal.

DATE —- — — MUST HAVE DETAILS
—- XXX charge account
Account of payment —- — XXX
Explanatory gloss

1.7 Major Accounts

Corresponds to the grouping of the operations of a business, segmented by category of resources or obligations in separate accounts. Kept in the ledger by extracting the data contained in the journal. The function of this register is to classify and group transactions by using the accounts.

1.8 Balance of Checking and Balancing

This is a summary of all ledger accounts with their respective debits, credits, and balances.

1.9 Major Adjustments to be Carried Out at the End of an Accounting Period

1.9.1 Seat Cut-Off of Result

Takes place at the end of the accounting period and has two effects:

• Close all accounts of results, so they start at zero the next accounting period.
• Build the account “usefulness of the exercise” or “lost year”, which is an equity account that represents the increase (or decrease) in the participation of owners as a result of the accounting period.

1.10 Financial Statements

1. Balance Sheet

It is a statement that shows the economic and financial situation of the company at a given time.

2. Information Delivery to the Balance Sheet

1. On liquidity
2. On efficiency
3. On debt
4. On profitability
5. Other

1.11 Income Statement or Profit and Loss Statement

It is an economic statement that reveals the result of economic management and how it generates income or loss from the company within a certain period of time.

Sales revenue
Less cost of sales
Gross Profit
————————————————–
Less Expenses of Administration and/or overheads
Less sales costs
————————————————–
Operational Utility
More or Less Non-Operating Results
————————————————–
Income Before Taxes
Less Taxes
————————————————–
PROFIT AFTER TAX

1. Information Delivery to the Income Statement

1. Composition of expenditures
2. Behavior of costs
3. Internal sources of funds generated by a company
4. Other

2. Value Added Tax (VAT)

1. Key Facts Taxed

1. Sales of movable tangible property
2. The provision of services
3. Imports

2. Subjects They Charge the Tax on Behalf of the Treasury

1. Sellers of goods
2. Providers of services
3. Importers

3. Base Tax

1. The value of the sale or service provision
2. The amount of the adjustments, interest, and finance charges forward transactions
3. The value of deposits in vac or that they do
4. Other taxes, e.g., tariffs

4. Major Exemptions

1. The species are delivered to workers in companies like royalty and are not his turn.
2. The supply of alcoholic beverages to personal business during working hours.
3. The pensioners whose sole purpose is food and housing for university students.
4. The local raw materials which are intended to produce goods for export.
5. Imports of military goods made by the defense ministry and its institutions.
6. Imports for diplomatic.
7. The lower imports do not affect duties carried out by passengers.

5. Tax Rates

Tax rates are 19% of the tax bases.

6. Mechanism of Tax

-Tax Credit: When a company buys movable tangible property or receives a service, it must pay both the value of what was acquired as well as 19% for VAT.
* For the purchasing company, it is an asset since it is a right that has been acquired.

Debit-tax: When the company sells products or provides services, you must refresh the impossible basis of the product or service by 19% government VAT.
* The selling company is a liability since it has been claimed on behalf of the Treasury; we have an obligation to him.

TAX DEBIT → What the company recovers
TAX CREDIT → What the company charges

• If the debit tax > tax credit (COBRA) (PAID) → The company should find out the difference in tax coffers, along with the statement, within the first 12 days of the next month.
• If the tax debit < the tax credit (COBRA) (PAID) → The company has a credit balance, which is an asset, which is expressed in UTM and saved for the next month.

1. Invoices Specified

• The RUT of buying and selling
• The net value of the transaction
• The amount of VAT
• The gross value = net worth + VAT
• The direction of the buying and selling
• The shift of both
• Bills are numbered consecutively by the SII

• The purchases made with a ballot were not eligible for tax credit.
• All sales are made, both as to ballot bill if they generate tax debit.

2.7 Recording of Information Relating to VAT

3. Interest and Discounts

1. Interest

The payment for the use of a certain amount of capital per unit of time.

There are two types:

1. Simple Interest: It is the interest calculated on the initial capital without considering the interest earned in previous periods.
   I = Cx ixn
   I → Interest
   C → Capital
   i → Interest rate
   n → Period of time
   Simple final amount (capital + interest) → M = C (1 + in)
2. Compound Interest: It is the interest calculated on the initial capital plus the interest earned in prior periods.
   Amount composite end → M = C (1 + i)ⁿ

2. Manner of Payment of Interest

1. Form Early
2. Form expired

Interest in advance:
Where i = interest due
Interest due:

3. Interest Rates

1. Interest received: Increases in the value of invoices or tickets when the client cancels within the agreed time or the value of the credit. These are earnings for the company.
2. Interest paid: Increases in the value of invoices, letters, or credit extended by suppliers are a cost to the company.

3.2 Discounts

3.2.1 Discounts

Discounts are the amounts that are deducted from invoices or tickets issued to clients. There are two types:

1. Trade discounts: What companies use to appeal to customers and place your items on the market.
2. Cash Discounts: Are those that are granted when paying the bill for early payment of her. This is no discount on the bill, only the conditions of it.

3.2.2 Discounts Obtained

Discounts are engaged suppliers to promote their sales or for early payment.

1. Trade discount is available: It is considered in the bill, meaning paying less tax. The purchase must be registered by the reduced amount.