SME Accounting: A Comprehensive Guide to PGC
Part 1. Conceptual Framework
The conceptual framework of the PGC establishes the principles and general rules for preparing and interpreting accounting information.
Part 2. Recording and Valuation Standards for SMEs
This section details the rules for recording and valuing assets, liabilities, and transactions specific to SMEs. An SME is defined as any company meeting the following criteria for two consecutive years:
- An average number of employees equal to or less than 50.
Part 3. Financial Statements
SME financial statements include:
- Balance Sheet
- Profit and Loss Account
- Statement of Changes in Equity
- Notes to the Financial Statements
These documents form a cohesive unit, reporting the company’s results and financial condition. Companies can voluntarily include a Statement of Cash Flows. These statements are mandatory and must be prepared by the employer or company directors within three months of the financial year-end. They must be filed with the Mercantile Registry of the province where the company is domiciled.
Part 4. Definitions and Accounting Relationships
This section defines and explains the movements within each of the 7 account groups comprising the company’s assets, liabilities, and equity.
Part 5. Chart of Accounts
The chart of accounts provides a detailed and consolidated view of all company assets. While the PGC provides a standard framework, companies can define their own chart of accounts with the appropriate level of detail for controlling and monitoring operations.
The Balance Sheet
The balance sheet presents a snapshot of a company’s assets, liabilities, and equity at a specific point in time, typically December 31st. It adheres to the fundamental accounting equation:
Total Assets = Total Liabilities + Equity
Assets are presented in order of liquidity (ease of conversion to cash), while liabilities and equity are ordered by enforceability.
Structure of the Balance Sheet
The balance sheet is structured into:
- Assets: Non-current assets and current assets.
- Liabilities and Equity: Equity, non-current liabilities, and current liabilities.
Each category is further subdivided into specific sections.
The Profit and Loss Account
The profit and loss account, also mandatory, reports a company’s financial performance over a fiscal year. It calculates the operating result and financial result, which together form the result before taxes. This is used to determine the income tax expense or benefit.
Notes and Other Financial Statements
The notes provide additional context and details to the information presented in the balance sheet and profit and loss account. They cover areas such as business activity, revenue application, assets, and financial liabilities.
The Statement of Changes in Equity
This statement details changes in equity during the fiscal year, including profit/loss, income/expenses recognized in equity, and transactions with partners (e.g., changes in share capital).
The Cash Flow Statement
While voluntary for SMEs, the cash flow statement provides insights into the sources and uses of cash.
Analysis of Financial Statements
Analyzing financial statements involves examining the balance sheet, profit and loss account, and other supplementary documents to understand a company’s financial position. This information is valuable to various stakeholders:
- Business owners
- Managers
- Potential investors
- Creditors (especially banks)
- Auditors, unions, tax authorities, etc.
Balance Sheet Analysis
Several scenarios can be identified when analyzing a company’s balance sheet:
- Overall Financial Stability: Non-current and current assets are fully financed by equity, with no liabilities.
- Normal Financial Stability: Working capital (current assets – current liabilities) is positive.
- Insolvency: Working capital is negative, indicating short-term liquidity problems.
- Long-Term Financial Imbalance: Undercapitalization and reliance on debt financing create solvency issues.
- Bankruptcy: Severe financial imbalance due to complete capitalization and accumulated losses. This leads to liquidation proceedings to satisfy creditors.