Accounting Procedures and Accounting Principles
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ScribdTranslationsAccounting Procedures and Accounting Principles
Uploaded by
ScribdTranslationsAccounting procedures and accounting principles
The accounting discipline has undergone substantial changes since Fra Luca
Pacioli created the accounting theory of debit and credit, which has remained without
major changes. Accounting as a discipline of human knowledge, has evolved in the
techniques and procedures used for the registration and control of commercial
operations. As the production process increased in complexity and moved from a
mercantile economy to a production economy, where capital goods were increasingly
important, the accounting process was enriched with greater procedures, techniques and
rules for management. of transactions. In this way, in principle a merchant was
interested in answering the question: how much had he earned? As he realized that to
generate profits he had to possess capital assets, information regarding the financial
position began to gain importance. In this way, the two basic financial statements
emerged, the balance sheet and the profit and loss statement. (Fernando, 2000)
Objectives and classification of accounting principles
They are norms and rules of a general or specific nature for the slow processing
of an entity's financial transactions.
The application of generally accepted accounting principles arises from a need to
report more clearly the financial situation and results of an entity. Suppose that a
company's purchases of fixed assets are recorded based on the price of the assets in the
market and not based on the acquisition cost. This situation could lead to reflecting an
overestimation in the financial situation that does not correspond to the company's
actual situation. Let's think on the other hand, the effect that would have if not recording
the depreciation corresponding to the fixed assets in use. This decision would involve
overestimating the profit for a period or underestimating the loss, as the case may be.
These situations could lead to the presentation of a financial situation and results that
are not adjusted to reality, which would violate principles applicable to financial
statements. In order to eliminate these situations, the accounting profession has referred
to the issuance of generally accepted accounting principles. A definition of what
accounting principles represent given by a collegiate body such as the Mexican Institute
of Public Accountants is, for example, the following:
"Accounting principles are basic concepts that establish the delimitation and
identification of the economic entity, the bases for quantifying operations and the
presentation of quantitative financial information through financial statements."
Objectives of the principles
Accounting principles are issued with the objective of standardizing the preparation
of financial statements. When talking about standardization, one must keep in mind that
financial statements can be used by different types of users, whether internal or external
to an economic entity. The basic objectives of accounting principles are:
Uniform accounting criteria
Establish special treatments for specific operations
Guide users of financial statements
Systematize accounting knowledge
Each of the named objectives is materialized through the application of specific
accounting principles. Let's now look at a classification of accounting principles.
Classification of accounting principles
A classification applicable to financial statements is shown below:
Entity: This principle establishes that every financial statement must refer to an entity
where the owner or shareholders are considered as third parties; That is, the personal
assets of the owner or shareholder must be segregated from the assets of the entity, the
company is considered as a legal and social economic unit! distinct from its owners or
proprietors.
Realization: An economic transaction must be recorded in the books only when the
operation that originates it has been perfected. The economic operations and events
recorded in accounting are considered carried out when exchanges have been carried out
with other economic entities, when internal transformations have occurred or when
there are factors external to the entity related to its operations and whose effect can be
quantified. This principle is one of the most important to evaluate timely and adequate
registration over time for many operations.
Double entry: The economic events carried out by an entity must be expressed through
accounting systems that der. to know the two aspects that every operation involves.
Historical cost: the monetary quantification and recording of operations must be
carried out at the corresponding production acquisition value. This principle of
historical cost is one of the most important and transcendental for the registration of
operations and transactions that affect a company.
Going concern: This principle establishes that unless otherwise stated, it is assumed
that a company that issues financial statements is able to continue its operations for a
reasonable period of time.
Sufficient disclosure: every financial statement must have the necessary information V
presented in an understandable manner so that the financial position and results of its
operations can be clearly known.
Relative importance: only those items that may have a significant effect on the
financial statements should be analyzed. There is no parameter that establishes from
what amount or figure an item can be considered of relative importance; in any case,
logical and reasoned judgment must be used.
Consistency: accounting principles must be applied uniformly from one period to
another; if not, the reason and effect of the changes must be explained.
Conservatism: sometimes known as conservatism or prudence, it establishes that losses
should be recorded when it is known or estimated when they will occur, while gains
only when they are realized.
These are just some accounting fundamentals and principles classified as basic
and that every economic unit must comply with! objective of presenting the financial
figures and results in accordance with what is established by the standards of the
accounting profession as shown in the image, there are other principles that can be
applied either to specific items of the financial statements or related to the presentation
of the latter.
Relationship between accounting principles and procedures
Accounting principles establish the guidelines for how the recording of operations and
the analysis and presentation of information in the financial statements should be
treated. An accounting principle determines the way in which transactions recorded in
the books and their presentation in the financial statements should be treated. In this
way, there will be certain accounting records that differentiate the treatments between
two types of business.
There are two types of accounting treatments and, as a consequence, two accounting
methodologies or procedures:
Completion percentage method
Terminated contract method
To explain with the previous example the relationship between accounting
principles and accounting procedures, we will analyze the treatments that derive from
the ARB-45 pronouncement, and we will explain each of the procedures that apply
under the two methods.
Completion percentage method
Under the percentage of completion method, revenue is recorded to the extent
that the profit is considered realized. The application of this method is an exception to
the principle of realization, which establishes. Revenue is recorded when it has been
earned or an exchange has taken place. The main advantage of the method is that the
work that has been carried out on contracts that have not been completed is shown, at
the same time that the profits are reflected periodically in accordance with the
accounting principle of association of income and expenses.
accounting procedure
Once the accounting principle has been selected, the procedure for its
registration must adapt to the adopted principle. Let's see what the applicable records
are in this case:
Record of contract costs:
xx-xx-xx x DB Cr
Asset Constructions in process xxx.xxx.xxx
Passive Accounts payable xxx.xxx.xxx
To account for the cost of construction of
the corresponding assets
Registration of billings to clients:
xx-xx-xx x DB Cr
Asset Accounts Receivable xxx.xxx.xxx
Passive Advance billings in contracts in xxx.xxx.xxx
process
To account for billing issued to clients
The entries detailed above correspond to those that must be made periodically
each financial year. In the last period of the contract the following entry must be made:
Record of contract termination:
xx-xx-xx x DB Cr
Passive Advance billing for construction in xxx.xxx.xxx
progress xxx.xxx.xxx
Asset Constructions in process
To account for the delivery of the work in
accordance with the construction contract
As can be seen, accounting records are derived from the application of an
accounting principle, which, at the same time, constitute the accounting procedure that
is applied in the recording of operations in accordance with the adopted principle.
Terminated contract method
Under the terminated contract method, contract profit is recorded when the
contract is terminated. This means that throughout the duration of the contract, profits
will not be reflected in the profit and loss statement, but only at the end of the contract,
in such a way that the profits will be reflected in the billings made by the company.
accounting procedure
The applicable records under the terminated contract method will be the
following:
Record of contract costs:
xx-xx-xx x DB Cr
Asset Constructions in process xxx.xxx.xxx
Passive Accounts payable xxx.xxx.xxx
To account for the cost of construction of
the corresponding assets
Registration of billings to clients:
xx-xx-xx x DB Cr
Asset Accounts Receivable xxx.xxx.xxx
Passive Advance billings in contracts in xxx.xxx.xxx
process
To account for billing issued to clients
At the end of the contract, the following record is made to record the profit made
ye! Closing the control accounts of the corresponding contract.
Record of the profit made and termination of the contract:
xx-xx-xx x DB Cr
Passive Advance billing for construction in xxx.xxx.xxx
progress xxx.xxx.xxx
Asset Constructions in process xxx.xxx.xxx
Earnings Gross realized profit
and loses
To account for the delivery of the work in
accordance with the construction contract
As can be seen again, there is a direct relationship between the adoption of an
accounting principle and the accounting procedure that ensures compliance with the
principle. All principles and procedures adopted will necessarily be reflected in the
financial statements.
Financial statements
The final result of the entire accounting process, of the applicable principles and of
the recording procedures developed, are the financial statements where the judgments
and criteria that management has of an entity are recorded. Financial statements must
reasonably reflect the figures of the financial situation and results of a company and
based on them make a series of decisions that are absolutely crucial for both internal
and external users. Three financial statements are basic for any entity.
• Balance sheet
• Statement of income
• Cash movement status
BALANCE SHEET
One of the main financial statements that is prepared by accountants is the
balance sheet, which shows the financial situation of an entity as of a certain date. The
balance sheet has two sections that counterbalance each other. First, the assets are
listed that represent the resources that the company has to be able to act, that is, the
assets and rights that the company has. On the other hand, the liabilities and
stockholders' equity are listed, which represent the obligations that the company has.
with third parties and with their owners, that is, those who own the company. Although
the term balance sheet is used, there are other names synonymous with such a financial
statement: statement of financial position or statement of financial position.
STATEMENT OF INCOME
An income statement reflects all the income, costs and expenses that correspond
to a given period. The net income or net loss of! period is shown on the last line of the
income statement. An income statement must reflect the expenses incurred during a
period in accordance with generally accepted accounting principles, as explained in this
chapter. For the long-term construction period contract example explained, the
percentage of completion method should reflect the gross profit realized in each
accounting period on the income statement. In this way, the income statement will
reflect the profit that, in accordance with the adopted accounting procedure, is in
accordance with the generally accepted accounting principles adopted by an entity, that
is, the income statement will show, for example, the corresponding estimated profit or
loss. to the period, according to the percentage of the work that has been completed.
Cash movement status
The cash movement statement has the objective of providing information
regarding cash receipts and disbursements related to an entity for a given period. The
cash flow statement segregates a company's operations into three types of activities:
operational, financing and investment. A cash movement statement is important, for
example, for an investor or financial entity since it will indicate to them the way in
which an entity is obtaining or using one of the most important elements of working
capital: cash.
State Objectives
The primary purpose of a statement of cash movements is to provide relevant
information about the receipts and disbursements of cash or cash equivalents of an
entity during a given period, so that users of the financial statements have elements
additional to those provided by the statement. the other financial statements for:
• Evaluate the entity's ability to generate future cash flows
• Evaluate the reasons for the differences between net income and related cash
receipts and disbursements
• Assess the effects on the financial position of an entity and the investment and
financing transactions that used cash and cash equivalents during the period
General structure of the state;
The resources generated and used during the period, for the purposes of this statement,
must be classified into:
• Derivatives from operations activities
• Derivatives of financing activities
• Derivatives of investment activities
Investment and financing transactions that affect the financial position of the entity,
but that do not affect cash flows during the period, must be disclosed separately. A
reconciliation must also be shown between the net income and the net cash flows from
operations, indicating the effects of all those transactions and other events that affect the
net income and cash flows. The monetary result for the year must also be shown. based
on the net monetary position in the case of the financial statements updated for the
effects of inflation in a section called “Financial cost”, together with the interest for the
period and exchange gains or losses.
BIBLIOGRAPHY