Understanding Key Financial and Accounting Terms
Depreciation
In economics and accounting, depreciation refers to the allocation of a tangible asset’s cost over its useful life. It represents the reduction in an asset’s value due to wear and tear, obsolescence, or other factors.
Grant
A grant is a non-repayable fund provided by a government entity or other organization to an individual, business, or another entity for a specific purpose. Grants do not require repayment and are often awarded based on merit or need.
Donation
A donation is a gift of money or property to a charity or other organization. Donations are typically tax-deductible and are governed by inheritance and gift tax laws. The tax amount depends on the asset’s value and specific regulations.
Legacy
A legacy, or bequest, is a gift of a specific asset or property left to someone in a will. It differs from inheritance, which refers to a portion of the entire estate.
Creditor
A creditor is an entity or individual to whom money is owed. They have the legal right to demand payment or fulfillment of an obligation, even in cases of bankruptcy.
Borrower
A borrower is an entity or individual who receives money or assets with the obligation to repay it, typically with interest, according to a predetermined agreement.
Assets
A company’s assets comprise all its property, rights, and other resources owned or controlled by the entity. These resources are used to generate economic activity and represent the company’s economic structure.
Accounting Principles
- Accrual Basis: Economic events are recorded when they occur, regardless of when the payment is made or received.
- Principle of Uniformity: Accounting methods and criteria should be consistently applied over time.
- Principle of Prudence: Risks and losses are recorded as soon as they are known, while profits are recognized only when realized.
- Principle of Non-Compensation: Assets and liabilities cannot be offset against each other and should be valued and recorded separately.
Accounting Books
- General Journal: A mandatory record of all economic transactions, sorted by date, with each entry consisting of a debit and a credit.
- Ledger: A record of all accounts used to classify and summarize financial transactions, organized by account rather than date.
- Book of Inventory and Annual Accounts: A mandatory record containing the initial balance, quarterly and year-end inventories, and annual financial statements.
- Minutes Book: A record of decisions made by shareholders during general meetings.
Financial Statements for SMEs
- Balance Sheet
- Profit and Loss Account
- Statement of Changes in Equity
- Report (Memoria)