Financial Accounting Fundamentals
Fundamentals of Financial Accounting
Introduction to Accounting
Financial Accounting: Provides information to users outside the company, such as investors, tax authorities, and creditors. Its main function is the issuance of financial statements and supplementary information.
Management Accounting: Forms the basis of the planning and control process. Its main function is to generate relevant information for proper decision-making.
Key Accounting Principles
Monetary Unit: Only accounting information that can be expressed in monetary terms is recorded.
Matching Principle: Income and expenditures must be recognized simultaneously.
Consistency: The same accounting method must be used from one period to another, except for justifiable reasons.
Conservatism: In cases of doubt, the criterion that involves the lower risk of overvaluing results or financial position should be chosen.
Stable Currency: The effect of inflation and exchange rate changes must be corrected and disclosed.
Realization Principle: Profit occurs when a sale is made.
Going Concern: It is assumed that the company will continue to operate indefinitely.
Economic Entity: Economic entities are distinct from their owners.
Duality: For each investment or use of resources, there is a corresponding source of funding.
Accrual Basis: The determination of results and financial position must consider all events of the period.
Financial Statements
Balance Sheet: Presents the financial situation at a given date. Shows the balances of assets, liabilities, and equity at a specific point in time. It is static, a snapshot of the entity’s economic process.
Income Statement: Shows the “result” of an entity’s management and its details. Its features include being dynamic, cumulative, and economic in nature.
Cash Flow Statement: Shows how the balance of cash and cash equivalents changed. Provides information such as the ability to pay debts, the need for external financing, the ability to pay dividends, and the causes of changes in cash value during the period.
Accounting Equation and Double-Entry
Accounting Equation: Assets = Liabilities + Equity. Everything a company owns (assets) is equal to what it owes to others (liabilities) and what belongs to the owners (equity).
Double-Entry Principle: To maintain the equality of the accounting equation, any increase in an asset must be accompanied by a decrease in another asset and/or an increase in liabilities or equity, and vice versa.
Transactions and Accounts
Transaction: Any economic and/or financial event that can be measured in monetary terms and recorded in the books.
Examples of Transactions:
- Increase one asset and decrease another: Buying a machine with cash.
- Increase assets and increase liabilities: Purchasing machinery with debt.
- Decrease a liability and decrease an asset: Paying off bank debt with cash.
- Decrease one liability and increase another: Restructuring debt.
Account: A record that accumulates all the individual movements of a financial item within a company. There will be as many accounts as needed to maintain distinctions in the company’s accounting. Accounts are often coded with numbers.
Account Types
Asset Accounts
Current Assets: Assets expected to be converted into cash, consumed, or sold within one year.
Fixed Assets: Physical assets acquired for use in business operations, not for resale.
Other Assets: Intangible or financial assets (not physical) whose benefits are expected to be received over a period exceeding one year.
Examples of Asset Accounts:
- Cash and Cash Equivalents
- Short-Term Investments
- Accounts Receivable
- Notes Receivable
- Inventory
- Prepaid Expenses
- Land
- Buildings and Facilities
- Machinery and Equipment
- Investments in Related Companies
- Intangible Assets
Liability Accounts
Current Liabilities: Obligations due within one year.
Long-Term Liabilities: Obligations due in more than one year.
Examples of Liability Accounts:
- Accounts Payable
- Notes Payable
- Accrued Expenses
- Short-Term Loans
- Long-Term Debt
Equity Accounts
Equity: Represents the owners’ stake in the company. It includes contributions from owners and retained earnings.
Examples of Equity Accounts:
- Common Stock
- Retained Earnings
- Dividends
Recording Transactions
Transactions are recorded using a double-entry system to maintain the balance of the accounting equation. Commonly used account formats include the FECU (Uniform Codified Statistical Form) used by the SVS (Superintendence of Securities and Insurance).