FINANCIAL ACCOUNTING 1

UNIT I

For me, the simplest way to contemplate

the law of attraction is to think that I am a
magnet, because I know that a magnet
attracts things to it.

JOHN ASSARAF

GOALS

• Analyze the different accounting concepts and identify each of the

components of accounting systems.

• Describe, analyze and interpret accounting information, from the record of the
transaction to its influence on decision making.

• Record operations in the Journal, General Ledger and preparation of Financial

Statements.
 FINANCIAL ACCOUNTING 2

ACCOUNTING: Definition

It is the process that consists of identifying, recording,

summarizing and presenting economic information to
the decision maker. Therefore, accounting organizes
and summarizes economic information so that users
can use it. They are presented in reports called
financial statements, which to prepare them,
accountants analyze, record, quantify, accumulate,
synthesize, classify, report and interpret economic
events and their effects on the company or business.

Accounting facilitates decision making by showing you where and when money is spent and
commitments have been made, evaluating performance and its consequences within a plan. It
also helps us to predict the future effects of decisions and to focus attention on current problems,
inefficiencies and opportunities.

Analysis and state

EVENT •> Registration •> Users

COMPONENTS OF THE ACCOUNTING SYSTEM

Cost accounting acts as a connection between financial accounting and management

accounting. This indicates that cost accounting concepts and techniques are used for financial
accounting and management accounting.5

FINANCIAL ACCOUNTING

The main objective of Financial Accounting is to provide information about the organization
about:

• Your Operational Results

• Your Financial Position
• Your Cash Flows

Financial results must be prepared in accordance with GAAP. The information contained in
financial statements is, in large part, directed to external users, such as potential investors or
government agencies.

5 CUEVAS, Carlos: COST ACCOUNTING. Third edition. PEARSON Publishing. Page 4-11
 FINANCIAL ACCOUNTING 3

COST ACCOUNTING

Cost Accounting plays a prominent role in financial reporting, since the costs of the product or
service have a significant importance in determining the income and financial position of any
organization.

MANAGEMENT ACCOUNTING

It is the process of identifying, measuring, analyzing, preparing, interpreting and communicating

financial information used by management to plan, evaluate and control the organization and
appropriately use its resources.

DIFFERENCES BETWEEN FINANCIAL ACCOUNTING AND

MANAGEMENT ACCOUNTING

In contrast to financial accounting, administrative or managerial accounting:

• It places more emphasis on the future. - Financial accounting reports and records
constitute the company's financial history. Transactions in accounting are only recorded
after they have occurred.

• Places less importance on accuracy - Management needs quick information and is

often willing to sacrifice accuracy to gain speed and agility in reporting.

• They are not governed by GAAP. - Financial accounting information must be reported
in accordance with GAAP. External users must accept the information as it is provided
by the organization, which requires ensuring presentation according to rules understood
and accepted by all.

• It does not present a single structure. Financial accounting is based on the following
fundamental equation.

6
ASSETS = LIABILITIES PLUS EQUITY

l
 FINANCIAL ACCOUNTING 4

• It is an option, an alternative, more than an obligation. Financial accounting is

mandatory. Accounting reports must provide information on all transactions carried out
over a period of time, regardless of whether these facts and figures are considered
useful or not. Every company must keep its tax reports updated. Management
accounting, on the other hand, is optional.

• It is a means to an end, rather than an end itself. - The purpose of financial

accounting is to produce financial statements for external use; After the financial reports
are prepared, the objective is met. Information in management accounting is only a
means to an end.

• It relates to the parts and to the entire business. - The financial statements refer to
the business as a whole. Although some companies subdivide income and expenses
according to the main lines of the business, the interest is in the globalization of the
figures and in the whole.

• Includes more non-monetary information. - Financial statements are the final product
of financial information and basically include monetary information. Management
accounting handles non-monetary information and monetary data.

USERS OF ACCOUNTING INFORMATION FOR DECISION MAKING

We can speak in general terms that the users of the financial statements would be internal
and external:

Shareholders – owners: their main interest is to monitor the

progress of the business in order to identify if profit,
profitability or simply if value is being generated on their
investment.

Creditors or potential creditors: your interest is

focuses on constantly evaluating an organization's credit
risk.

Financial analysts and potential investors: their interest is aimed at evaluating accounting
information in a comprehensive manner in order to qualify the potential of the organization and
sustainably establish the possibility of applying investments in a company.
 FINANCIAL ACCOUNTING 5

Bankers: in the same way that creditors are interested in the good management of financial
positions to qualify credit risk.

Other users : There are users who have diverse and specific interests in accounting information,
such as: donors, investors in associations, entities in litigation.

Finally, there are those users who are interested in the final result of the business based on the
benefits they could obtain, among them we can point out the Government, the employees and
again the shareholders.

Of course, these users or better interested in the financial statements depend on the validity,
reliability and timeliness with which the information is presented. These responsibilities then rest
on those who generate the information, those who control or allow the development of the
business and ultimately those who manage the organizations.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES GAAP

They are basic standards that govern accounting tasks

regardless of the field or scope of application, which is why
they are Generally Accepted and are closely related to and
based on International Accounting Standards.

Although the set of GAAP involves more than 100 accounting

standards, it is important to at least establish some on which
much of the accounting work revolves. Among the most
important and even fundamental GAAPs, we can mention:

Entity : it is the company, organization, natural or legal person who is interested in the
registration of transactions since they correspond to and affect them directly.

Going Company : the fundamental understanding is that companies or organizations are

created with the intention of existing for important periods of time. The transaction record seeks
to support that this principle is maintained over time.

Currency of account : accounting records must be made in the monetary unit of the company,
or better of the country in which the company operates. However, in the cases of companies that
are subsidiaries or branches of foreign companies, in many cases they use the accounting
record of the local currency only for local purposes, but to report to their parent companies they
do so in the currency of their parent company. With dollarization, in some way, this type of
process has been simplified for accountants in Ecuador, since in general the reporting currency
 FINANCIAL ACCOUNTING 6

has been the dollar.

Essence over form : The fundamental idea is that the accounting record satisfies the
accounting essence rather than the legal form. Likewise, with the appearance of the Ecuadorian
Accounting Standards, with the support of the Internal Revenue Service, it would seem that we
are on the way to reducing controversies between the legal form and the accounting substance
in the registration of transactions.

Estimation : accounting, since it does not respond to the exact recording of economic facts, is
supported by the use of estimates to record its transactions. A typical example of an estimate is
one that is carried out with respect to the useful life of a fixed asset and that allows the
distribution or allocation of the cost over the time in which said asset is used in accordance with
the estimated useful life already indicated. It should be noted that in this case, as in the case of
estimates in general, it is necessary to maintain an adequate control system that allows us to
know the accounting status of the asset at all times. Only as a complement to the example of
fixed assets we must point out that the intention to distribute the cost of fixed assets over the
useful life periods charged to the result seeks in some way to indirectly generate a provision for
the acquisition of the new replacement asset. , since the depreciation charge makes the profit
lower and in fact indirectly means that dividends are not distributed to the shareholder for that
value and as a result of this the shareholder could be said to be capitalizing thinking about the
asset to be replaced.

Professional judgment or criterion : the recording of transactions is carried out by applying all
existing regulations, but it must be remembered that the analysis of the economic fact and the
orientation of the record itself corresponds to the accounting professional, who is expected to
have sufficient expertise to appropriately apply their good judgment or criteria, based on
technical knowledge and experience.

Double entry : the recording of transactions with the understanding that for each record of a
debit value one or more credits corresponds, helps us to understand in depth the concept of a
double entry fund. It is worth emphasizing, however, that the simple “matching” between debits
and credits does not imply the correct recording of the transaction.

Realized : income is recorded when it is realized, that is, when the transaction has been
completed through the delivery of the good, and supporting documents exist.

Accrual : It is used to record expenses as the service is received and not based on payment.
 FINANCIAL ACCOUNTING 7

Cause and effect : a good relationship is actually sought between expenses and the income
from which they originated.

Period : if you think about the need for the information to be comparable from one period to
another, then it seems logical to clearly establish the period of analysis and recording of the
information. Conventionally this period corresponds to one year. Especially for tax purposes, it is
measured from January 1 to December 31. However, there are companies that use a corporate
year that begins, for example, on December 1 of the year 20x0 and ends on November 30 of the
year 20x1. Additionally, it must be seen that in today's world there are increasingly smaller
“subperiods” that seek to satisfy information needs and that range from 6 months to daily
periods.

THE ACCOUNTING EQUATION

Double entry : the recording of transactions with the understanding

that for each record of a debit value one or more credits
corresponds, helps us to understand in depth the concept of a
double entry fund. It is worth emphasizing, however, that the simple
“matching” between debits and credits does not imply the correct
recording of the transaction.

Accounting equation: shows the equality of assets and rights with

assets called shares. The accounting equation, like any mathematical formula, can be solved
and any of its members can be obtained.

ASSETS = SHARES
ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY

Balance Sheet: It is one of the most important financial statements, which shows the financial
situation of the company or business at a given time. The Balance Sheet has two sections that
balance each other, on the left side the assets that represent the company's resources. And on
the right side, the liabilities and stockholders' equity are listed, which represent the sources of the
resources used to acquire the asset.

ASSET: These are the economic resources that are expected to increase, that generate future
cash inflows, that reduce and prevent future cash outflows; for example cash, inventory,
equipment.

LIABILITIES: These are the obligations or economic participations of an organization on its

assets by external entities or individuals. Example, a bank debt.
 FINANCIAL ACCOUNTING 8

STOCKHOLDERS' EQUITY: It is the remainder of the organization's assets, once the liabilities
have been deducted. When a business is born, shareholders' equity is measured by the total
amount invested by its shareholders.

Example 1: A business has assets of $2,500 and liabilities of $700. What is the shareholders'
equity?

A = P + C m--------------C = A - P
C = 2,500 - 700
C = 1,800

Example 2 : A legal professional sets up a business with an asset value of $

18,250 and shareholders' equity of $12,000. What is the liability or indebtedness with third
parties?

A = P + C m--------------P = A - C
P = 18,250 - 12,000
P = 6,250

IMPACT OF THE TRANSACTIONS ON THE BALANCE SHEET:

In the following example we are going to analyze the ordinary transactions of the LUPIS AT
Company. And how these affect the general balance.

Transaction 1: Initial Investment : The company's first transaction was the owner's investment
on January 2, 2005. Mr. Fabian T deposited $400,000 into the business bank account titled
LUPIS AT. The accounting equation is affected in the following way:

ASSET = + SHAREHOLDERS'
PASSIVE EQUITY
Cash Fabián T +400,000 (owner investment)
+400,000
This transaction increases the assets (cash) and shareholders'
equity of Fabián T. The liabilities are not affected, because they do not produce obligations for
the Company. With people outside the entity
 FINANCIAL ACCOUNTING 9

FINANCIAL STATEMENTS
Once the operations have been recorded and analyzed, the
next step of the accounting process is the presentation of the
results, therefore the accountant reflects it in the Financial
Statements, which are documents in which the financial
information of the business is reflected. The main financial
statements are: Balance Sheet, Income Statement and
Cash Flow. Statement of

Balance sheet: known as the statement of financial position where it is presented

all assets, liabilities and stockholders' equity of an organization as of a certain date or the end of
the period.

Income Statement: also called Profit and Loss statement, it presents a detail of all the income
and expenses incurred by the company in an accounting period.

Cash Flow Statement : presents the cash receipts and cash payments of an entity, during a
given period. Like the income statement, it summarizes the activities for a certain time, and,
therefore, it must include the exact period it covers.

Statement of Changes in Equity Position: Statement of Stockholders' Equity, presents the

summary of the changes that occurred in the entity's stockholders' equity during a specific
period. The increases come from the investments made by the owner and the profit obtained in
the period. The decreases are the result of capital withdrawals made by the owner and a net loss
obtained in the period.

ACCOUNT TYPES

In accounting the account has a T shape and consists of the following parts:

Account name: is the generic name given to a group of securities of the same nature or kind.
110505 General
box
Debit on the left side, it is synonymous with charge, debit, entries, all values received are noted.
 FINANCIAL ACCOUNTING 10

On the right side, also called credit or output, all the values delivered are noted.

Balance resulting from the difference between debit and credit. The balance can be debit, credit
or zero. An account has a debit balance when the debit is greater than the credit; The balance is
credit when the credit is greater than the debit and is zero when the debit and credit are equal.

DEBIT AND CREDIT

As indicated above, the left side records the charges or debits and the right side records the
credits or credits.

DEBITS – Just means recording values on the left side of an

account.

CREDITS : as it means recording values on the side

right to an account. Either depending on the nature of the account means increases or
decreases.

Considering the cases in which the different asset, liability and stockholders' equity accounts are
debited or credited, the following relationships are established:

EVERY DEBIT GENERATES

INCREASE IN AN ASSET ACCOUNT

DECREASE IN A LIABILITY ACCOUNT
DECREASE IN A CAPITAL ACCOUNT

ALL CREDIT GENERATES

INCREASE IN A LIABILITY ACCOUNT

INCREASE IN A CAPITAL ACCOUNT
DECREASE IN AN ASSET ACCOUNT
 FINANCIAL ACCOUNTING 11

ANALYSIS AND RECORDING OF OPERATIONS IN THE JOURNAL BOOK

The first registration is made in the Journal, which is nothing other than the chronological record
of the operations carried out by a company through the so-called accounting entries. The
Accounting Entry is the mental and written conception of a transaction carried out, recording
what was done. The accounting Entry must contain: Entry Number, Date, Accounts, Values and
Explanation.

RECORD OF OPERATIONS IN THE GLOBAL BOOK

In the General Ledger, what is recorded in the Journal

is recorded or transferred to each of the appropriate
accounts, the debits are passed as debits to the ledger
and the journal credits are passed as
wholesale credits.

The Ledger is foliated (numbered), covered by several

sheets, each of which represents an account. But for
educational purposes we will record them in the
general ledger in the “T” formats and they will be used
during this course.

PREPARATION OF FINANCIAL STATEMENTS.

PREPARATION OF TRIAL BALANCE:

The Trial Balance is a list of all accounts with their balances and sums, its purpose is to
determine that the records made in the Journal and passed to the General Ledger correctly so
that the sum of the debits (DEB) are equal to the sum of the credits (CREDIT) and finally the
sum of the debit balances are equal to the creditors.

To prepare the Trial Balance, its structure is as follows:

V Header: includes the name of the company, name of the document, and the period to
which it corresponds.

V Body of the Document (depending on format): includes Number or code, Accounts, Sums
(debit and credit) and Balances (Debtor and Creditor).
 FINANCIAL ACCOUNTING 12

“LUPIS AT” COMPANY

TRIAL BALANCE
As of: January 12, 2005

No. ACCOUNTS SUMS BALANCES

HAS TO HAVE 1 DEBTO CREDITOR
R

1 BOX 500.700 158.000 342.700

2 Accounts Receivable 1.000 700 300
3 INV. GOODS 160.000 800 159.200
4 STORE EQUIPMENT 15.000 1.000 14.000
5 Accounts payable 4.800 21.000 16.200
6 Documents to pay - 0- 100.000 100.000

7 accounting capital - 0- 400.000 400.000

SUMAN 618.500 618.500 516.200 516.200

Eng. Luis Ramos MANAGER Lic. Juan Luna

ACCOUNTA
NT
PREPARATION OF THE BALANCE SHEET:

On any date, an accumulated total can be extracted from each account. In the following balance
sheet, majorization totals are used. We will observe the financial impact of all operations until a
certain date, in this case January 12, 2005.

The LUPIS AT company can prepare a balance sheet after each transaction, it is obvious that in
practice it would be cumbersome and unnecessary, therefore, the balance sheet is usually
generated once a month.
 FINANCIAL ACCOUNTING 13

“LUPIS AT” COMPANY

BALANCE SHEET
As of: January 12, 2005

ASSET LIABILITIES AND

SHAREHOLDERS' EQUITY

Box 342.700 Documents to pay 100.000

Accounts Receivable 300 Accounts payable 16.200

Merchandise Inventory 159.200 TOTAL LIABILITIES 116.200

Store equipment 14.000 Shareholders' Capital 400.000

TOTAL LIABILITIES +
TOTAL ASSETS 516.200 516.200
CAPITAL

Eng. Luis Ramos MANAGER Lic. Juan Luna

ACCOUNTA
NT
 FINANCIAL ACCOUNTING 14

• • Write a financial accounting concept

• What are the external and internal users?

• Describe the components of the accounting system

• State GAAP

• State the concept of each of the main accounts

• What is double entry
• What does going concern mean?
• Write a concept of journal, general ledger.
• Make an example of each of the main EEFFs

EXERCISES:

1. PURCHASE ON CREDIT : The LUPIS AT company on January 3, 2005 purchased

bicycles from the manufacturer for $10,000. The manufacturer wants to be paid
$4,000 on January 10 and the balance in 30 days.

2. PURCHASE IN CASH AND CREDIT : The company LUPIS AT on January 4, 2005

purchased various equipment for the store for a total of $15,000. Give an initial
payment of $4,000 and the balance will be settled in 60 days.

3. SALE ON CREDIT : The company LUPIS AT on January 5, 2005 sold a storefront

to a neighboring business, after it was decided that it did not like it. The sale price is
$1,000, equal to the purchase cost.

4. RETURN OF PURCHASE TO THE SUPPLIER : The company LUPIS AT on

January 6, 2005 returns inventory items (which it acquired on January 3 for $800) to
the manufacturer, in exchange for a full credit (a reduction of $800 of the debt that
had with him).
 FINANCIAL ACCOUNTING 15

5. PAYMENT TO CREDITORS : The company LUPIS AT on January 10, 2005 pays

the manufacturer the $4,000 mentioned in transaction 4

6. COLLECTION FROM DEBTORS : The LUPIS AT company on January 12, 2005

collected $700 of the $1,000 owed by the neighboring business,
 FINANCIAL ACCOUNTING 16

UNIT II

The other side of the coin is having good

emotions and feelings. You know when they
arrive because you feel good. Enthusiasm,
happiness, gratitude, love.
Imagine if you could feel that every day. When
you celebrate good feelings, you attract more
good feelings and things that make you feel
good.

LISA NICHOLS

AIM

• Learn to relate commercial laws with accounting, acquiring practice in the

management of certain legal texts, as well as knowing what the
classification of companies is and the advantages of their creation.
 FINANCIAL ACCOUNTING 17

CORPORATE ACCOUNTING

COMPANIES
Although most businesses are single-owner, the fact is that the
largest, at least from the point of view of the size of capital
resources, are owned by more than one person. Such
companies are known as companies.

A company is the group of people who establish themselves as

a legal entity, in order to carry out a lucrative activity within the
scope established by law.

They can also formalize contracts, own, manage and sell assets.

To establish a company, it is necessary to prepare a deed, constitution, in which the terms of the
agreement are stipulated.

Society is a set of individuals who share a culture with their behaviors and purposes, and who
interact with each other to form a community . Although the most developed societies are
human societies (which are studied by social sciences such as sociology and
anthropology ), there are also animal societies (studied by sociobiology or social ethology )
2
. . Corporate accounting has different branches that are aimed at different sectors that
can have an influence on society. 3

It is very important to distinguish that within companies we can find two main ones, which are:
Capital or Share Companies and Partnerships. The difference
We basically find it in the way in which the assets of each of them are
constituted.

Within capital companies we can say that the most important is

the public limited company. They are classified as capital
companies, since their ownership is evidenced by shares.
Shareholders can have a voice and

2
http://definicion.de/sociedad/
3
http://www.gestionyadministracion.com/contabilidad/contabilidad-de-sociedades.html
 FINANCIAL ACCOUNTING 18

vote in the general direction of the company's affairs through the shares they own and in direct
proportion to their number. Property is therefore an impersonal thing, with owners whose
personal identity is not necessary either for the company or for third parties (for example:
creditors of the company).

The second type of companies constitute partnerships. In these, the ownership of the business
is of a more personal nature, the general control of the business is not by the batch of shares,
but by people with full individual identity, whose names by law must be publicly disclosed. Doing
business with a partnership is like doing business with a company owned by identified and
known people, in contrast to the corporation whose ownership is anonymous in nature.

GENERAL FEATURES

The deed of incorporation of a company must contain

• Company name of the company

•The names, nationality and home
• Economic activity
• Social capital
• The address of the company
• Appointment of administrator

• The way in which profits and losses will be distributed

among members of society
• The reserve fund amount
• Cases in which the company must be dissolved early.

COMPANY IN COLLECTIVE NAME

The company in a collective name is contracted between two

or more people who do business under a company name.
According to the Companies Law Art 35.

COMPANY NAME.- is the enunciative formula of the names

of all the partners, or some of them, with the addition of the
words “and company”. Only the names of the partners can
be part of the company name.” Example: HEGOVESA.

CONSTITUTION.- The contract for the constitution of this

company must be concluded by public deed, which must be granted by the civil judge of the
respective jurisdiction. The judge will then order the publication of an extract of the deed, by the
 FINANCIAL ACCOUNTING 19

press, and the registration in the Commercial Registry.

CAPITAL.- is made up of the contributions that each of the partners delivers or promises to
deliver. For the constitution of the company, the payment of no less than 50% of the subscribed
capital will be necessary. If the capital was contributed in bonds, securities or assets, the social
contract will record this and its valuations.

PARTNERS.- Any person who, according to the commercial code, has the capacity to trade will
also have the capacity to form part of a company in a collective name. The partner of this
company will participate in the profits or losses that occur and will be subject to joint and
unlimited liability for the acts carried out by him or any of the partners, provided that they were
authorized to act for the company.

This company is the oldest of all, which emerged as a way to expand the domestic economy of
families and was made up of relatives, parents and children and people close to the family.

APPLICATION EXERCISES

On January 3, 2000, in the city of Quito, the company was established under the collective name
Guacho Cevallos / Cía., belonging to:

• Alejandra Guacho $ 85000

• Veronica Cevallos $ 150000

GUACHO CEVALLOS CIA

CONTRIBUTION TABLE

PARTNERS BOX COMMODITY TOTAL %

INPUT

Alejandra 50,00 35,00 85,00 36,17

Guacho

Veronica 50,00 10,00 150,00 63,83

Cevallos
 FINANCIAL ACCOUNTING 20

RECORD OF TRANSACTIONS

DATE DESCRIPTION PARTIAL HAS TO TO HAVE

BOX 100,00
COMMODITY 135,00

SOCIAL CAPITAL 235,00

Alej Guacho 85,00

Veron Cevallos 150,00

Registration of the constitution

EXERCISES 2

On May 17, 2000, the company was established in the collective name, Gómez Fiallos Cía.
Prepare the contribution table and record the transactions.

• Mariana Luna contributed $450.00

$ 100,00
• Cash
• Commodity $ 250,00
$ 100,00
• Furniture and
fixtures
• César Villa $ 675,00
contributed
• Cash $ 75,00

• Banks $ 100,00

• Commodity $ 500,00

• Diana Suarez $ 388,00

• Banks $ 388,00
 FINANCIAL ACCOUNTING 21

SIMPLE LIMITED COMPANY

The simple limited company exists under a corporate name and is

contracted between one or several partners jointly and unlimitedly and
others, simple fund administrators, called limited partners, whose liability
is limited to the amount of their contributions. In art. 58 of the companies
law. The death of a limited partner is not cause to liquidate the company

COMPANY NAME.- will necessarily be the name of one or more of the jointly liable partners, to
which the words Limited Company will simply be added.

CONSTITUTION.- For the constitution of this company, the same solemnities are required as for
the company in a collective name.

CAPITAL.- The limited partner cannot provide his capacity, credit or industry as a contribution to
the company. Likewise, you may not transfer or assign your rights in the company to other
people, without the consent of the other partners, in which case a new corporate deed will be
signed.

ADMINISTRATION.- The administration will be governed by the provisions for the company in
collective name, keeping in mind that it will be administered by the joint and several partners that
have been determined in the corporate deed.

EXERCISES

On August 10 in the city of Riobamba, Villa Rodríguez y Cia en Comandita Simple was
established.

Galo Villa contributes $ 485,00

Cash $ 65,00

Commodity $ 75,00

Computer Equipment $345.00

Andrés Rodríguez contributes $485.00

Cash $ 485,00

Required: Prepare the contribution table, and record the initial transaction
 FINANCIAL ACCOUNTING 22

LIMITED LIABILITY COMPANY

The limited liability company is one that is contracted between

three or more people, who are only responsible for social
obligations up to the amount of their individual contributions and do
business under a company name or objective name to which will
be added, in all cases. case, the words COMPAÑÍA LIMITADA.

BASIC CHARACTERISTICS

The limited liability company is always commercial, but its

members, by virtue of establishing it, do not acquire the
status of merchants.

This type of company can engage in any civil or

commercial activity permitted by law, with the exception of
banking, insurance, capitalization and savings operations.

It cannot function as such if the number of partners

exceeds 15; if this happens, it must be liquidated or
transformed into another type of company. For fiscal and
tax purposes, limited liability companies are capital
companies.

The public deed of formation of a limited liability company will be approved by the
Superintendent of Companies, who will order the publication of an extract of the deed in the
newspaper with the greatest circulation at the company's domicile and the registration in the
commercial registry.

PARTNERS

To be a partner in a limited liability company, civil capacity to

contract is required. However, they cannot do so between
parents and non-emancipated children or between spouses.
Legal entities may participate as partners, with the exception of
banks, insurance, capitalization and savings companies and
foreign public limited companies.

The liability of the partners will be limited to the value of their

 FINANCIAL ACCOUNTING 23

social participation, to that of ancillary benefits and supplementary contributions, in proportion to

what the social contract has established.

CAPITAL

The capital of the company will be made up of the contributions of the partners, divided into
shares of $1.00 or multiples of one, and will not be less than $400.00. When the company is
formed, the capital must be fully subscribed and at least 50% of each contribution must be paid.

ADMINISTRATION

The general meeting, formed by the partners legally summoned and assembled, is the supreme
body of the company. Resolutions will be made by absolute majority, unless otherwise provided
by law, or express provision in the contract.

LIMITED COMPANY BY SHARES

The capital of this company will be divided into registered

shares of equal par value. At least one tenth of the share
capital must be contributed by the jointly responsible
partners (commanded), to whom non-transferable
nominative shares will be given for their shares. According
to the company law in its Art 356.

Company name.- is composed of the name of one or more

partners adding a Limited Company.

The minimum capital is $200.00 divided into registered shares of equal value, which will be
delivered in cash or in assets valued by a competent professional.

EXERCISE

As of January 31, 2000, the entity Fiallos Abiertos Compañía en Comadita is established by
shares; With a capital of $1,250,000 divided into 250 shares, there are 5 shareholders.

44 actions
• TO
• b 60 shares

• c 46 actions

• d 48 shares

• AND
52 shares
 FINANCIAL ACCOUNTING 24

It is requested:

• Prepare the contribution table

• Record the initial transaction
 FINANCIAL ACCOUNTING 25

COMPANY IN CORPORATION

In art. 155 of the companies law. The purpose of the public

limited company is the exercise or export of an industry under its
corporate signature, endowed with its own assets.

• The company name must be accompanied

by the term COMPAÑÍA ANONIMA, OR SOCIEDAD
ANONIMA

• The minimum capital is $400.00, divided into

negotiable shares of equal value, shareholders are liable only for the amount of their
shares.

• The legal reserve of this type of company must be at least 10% of the liquid profits,
without exceeding 50% of the share capital. The minimum number of people

CHARACTERISTICS OF THE LIMITED COMPANY

Due to the limitation of liability and liquidity, the public limited company is called upon to perform
an important economic and social function.

• Concentrate on savings and form companies that cover broad markets, with advanced
techniques and operate on the basis of the economy of scale system.

• By pooling financing, they make it possible for people who would not have sufficient
resources to undertake an activity of this type to participate in the formation and profits
of large industrial organizations.
 FINANCIAL ACCOUNTING 26

MIXED ECONOMY COMPANY

ART. 363.- The state, municipalities, provincial councils and

public legal entities or public legal entities may participate,
together with private capital, in the capital and social
management of this company.

Mixed economy companies are dedicated to the development

and promotion of agriculture and industries suitable for the
national economy and the satisfaction of collective needs; to the provision of new public services
or the improvement of those already established.

• The corporate name of this type of entity must be accompanied by the term MIXED
ECONOMY COMPANY, or the acronym CEM.

• The minimum capital is $200.00, divided into tradable shares.

• The partners are the Ecuadorian state, the municipalities, the provincial councils, public
or semi-public legal entities and private persons.

EXERCISES

In the city of Riobamba, on February 1, 2000, the company XYZ was established. In collective
name. The incorporation contributions of the partners are in cash.

• TO $ 25000.00
• b $ 26000,00
• c $ 28000,00

Within the constitution, a withdrawal of $8,000.00 dollars per year per partner is established, a
value that will be discounted from their future profits.

• 12-31-2000 The established value is withdrawn. It is determined that the utility to the
date is $14000.00 Dollars.
 FINANCIAL ACCOUNTING 27

CONTRIBUTION TABLE

PARTNERS BOX OTHERS TOTAL %

INPUT

TO 25000,00 25000,00 31.65%

b 26000,00 26000,00 32.91%

c 28000,00 28000,00 35.44%

RECORD OF TRANSACTIONS
Date Description Partial Has to To have

Box 79000,00

Social capital 79000,00

TO 25000,00

b 26000,00

c 28000,00

XYZ Incorporation Registration

Retirement A 6000,00

Retreat B 6000,00

Retirement C 6000,00

Box 18000,00

The annual retirement of the partners was

held

Exercise Utility 14000,00

Accounts payable 14000,00

Partners
A 4431.00
 FINANCIAL ACCOUNTING 28

Partners B 4607.40

Partners C 4961.60

Record of the profits of each partner

Accounts payable 14000,00

Partner A 4431,00

Partner B 4607,40

Partner C 4961,60

Accounts Receivable 4000,00

Partner A 1569,00

Partner B 1392,60

Partner C 1038,40

Retirement A 6000,00

Retreat B 6000,00

Retirement C 6000,00

Record of the withdrawal of profits and payment that must be made by the company's
partners

MERGER OF COMPANIES

CONCEPT

Reunion of two or more companies into one, through absorption

or incorporation. In neither case is the absorbed or merged
companies liquidated.

A Merger constitutes the absorption of one company by

another, with the disappearance of the first, and carried out
through the contribution of the assets of the latter to the second
company. The Fusion can
 FINANCIAL ACCOUNTING 29

It can also be done through the creation of a new company, which, through contributions,
absorbs two or more pre-existing companies.6

The Merger is the meeting of two or more independent companies into one .

TRANSFORMATION.- Change of the species or type of company into a different one, carried
out by reform of the statutes and maintaining the original legal personality. No shareholder loses
his or her status as such in the event of a merger, transformation or division of the company.

CHARACTERISTICS OF THE FUSION .

Pooling by two or more companies of all their assets with the taking of liabilities, either
producing the creation of a new company, or making consented
contributions to a pre-existing company (absorbing) and
increasing its capital in the event that the net assets exceeds its
subscribed capital;

The disappearance of the contributing or absorbed company(s);

The attribution of new social rights to the associates of the disappeared companies;

According to the opinion of Dr. José Luis Taveras , " Fusion is characterized by:7

• Dissolution of the absorbed company that disappears as a legal entity;

• Transmission of the universality of the assets of the absorbed company to the company
absorbent;

• The shareholders of the absorbed company become partners of the absorbing company;

• " Mergers are operations generally practiced in periods of economic expansion or

crisis."

TYPES OF FUSION

• Merger by integration
• Merger by integration or absorption

LEGAL ASPECT

The merger cannot be carried out until 3 months after the reference publication. This to know
any absolute disagreement with creditors. The opposition of the creditors suspends the
execution of the merger until it is withdrawn or rejected by a judgment that causes it to be
enforceable. The merger must be carried out in accordance with what the law establishes for
each type of company that merges, so that for partnerships there must be a unanimous
agreement of the partners. The company that subsists or is born from the merger will bring
6 http://www.legalinfo-panama.com/articulos/articulos_33a.htm
7 http://www.legalinfo-panama.com/articulos/articulos_33a.htm
 FINANCIAL ACCOUNTING 30

together all the partners of the merged companies and each of them will assign the participation
that corresponds to them.

DISSOLUTION OF COMPANIES

CONCEPT

The state or situation of a legal entity that loses its legal capacity to fulfill the purpose for which it
was created and that only subsists, with a view to the resolution of the links established by the
company with third parties, by it with the partners and by these among themselves - Dissolution
is, therefore, the preparation for the end, more or less distant, but it does not imply the end of the
company since once dissolved, it will be placed in liquidation and will retain its legal personality
solely for those purposes.

LIQUIDATION OF COMPANIES

CONCEPT

Liquidation constitutes the final phase of the state of dissolution.

Liquidation of commercial companies is understood as the set of legal acts aimed at concluding
the links established by the company with third parties and with the partners and by these
entities themselves. The acts in question receive the generic name of liquidation operations and
will be carried out in two successive stages to which reference will be made later; liquidation
operations themselves and those whose purpose is the division and distribution of corporate
assets among the partners.

TECHNICAL BANKRUPTCY OR EXTRAJUDICIAL LIQUIDATION

It consists of the liquidation of a public limited company that is in fact bankrupt, since its losses
have absorbed its share capital and affected the capital of others, that is, the credits of its
suppliers, creditors, etc.

SOLVE

• On January 2, 2000, the company XYZ was established. The incorporation contributions
of the partners are in cash.
x $ 28000,00
AND $ 26000,00
Z $ 30000,00

Within the constitution, a withdrawal of $18,000.00 Dollars per year per partner is established, a
value that will be discounted from their future profits.

12-31-2000 The established value is withdrawn

12-31-2000 It is determined that the profit to date is $12,000.00 US dollars.

 FINANCIAL ACCOUNTING 31

• On January 2, 2000, the ABC company was established. The incorporation contributions
of the partners are in cash:
TO $ 28000,00
b $ 26000,00
c $ 30000,00

12-31-2000 A new partner joins company D with a value of $30,000.00. For his entry, he delivers
a bonus of $20,000 dollars that will form part of the partners' capital.

• On February 2, 2000, the company AMIGOS FELICES was established. The

incorporation contributions of the partners are in cash.
EITHER $ 32000,00
Q $ 36000,00
Q $ 34 000,00

02-03-2000 The need to expand the company's market reaches the partners to make the
decision to accept a new partner D, the agreement outlines the new partner having a
participation of 35% of the total capital

• On March 2, 2000, the company XYZ was established. The incorporation contributions
of the partners are in cash.
x $ 25000,00
AND $ 32000.00
Z $ 20000,00

04-01-2000 For personal reasons, Partner A decides to leave the company; The other partners,
in order not to decapitalize the company, allow him to leave the company as long as he delivers
20% of his contribution to the share capital.

• On January 2, 2000, the partners of ABC company set an annual withdrawal of

$6,000.00 per partner.

12-31-2000.- The annual members' retreat is held

12-31- 2000.- The profit for the year is determined $ 30,600.00

The percentage of contribution of the partners is:

 FINANCIAL ACCOUNTING 32

PARTN TO 35%
ER
PARTN
b 32%
ER
PARTN
ER c 33%

EVALUATION ACTIVITIES

• What is a society
• What is the classification of companies?
• What is a society of people
• What is the capital for a company in collective name
• That is limited partners
• That is occulted partner
• That is a limited company
STUDYING • Which is the characteristic of the anonymous
company
at is a mixed company

e a concept of merger of companies, dissolution of companies and liquidation

 FINANCIAL ACCOUNTING 33

UNIT III

The good news is that when you decide that you know
it is more important than what you have been taught to
believe, you will have changed gears in your pursuit of
abundance. Success comes from within you, not from
outside.

RALPH WALDO EMERSON

•

Understand and carry out a theoretical - practical study of the legal

GOALS structure of companies, applying accounting principles through the
registration of agency and branch operations
 FINANCIAL ACCOUNTING 34

AGENCIES

CONCEPT

An agency is an entity, physical or moral, that carries out

its activities with economic and administrative
independence from the parent company. Its function is to
distribute the products of a third party, which is known as
the parent company. For this reason, the establishment of
agencies represents an important instrument of business
development and growth.

CHARACTERISTICS OF THE AGENCIES

The most important characteristics of a sales agency are the following:

1. It normally distributes products from different brands and manufacturers. When there is
no exclusivity contract with the company, the agent can obtain a greater income,
working for several companies, which even manufacture similar products.

2. The distinctive feature of sales agents is that they charge a commission for the goods
sold. Sales billing is carried out directly by the parent company, and the agent only
records the income from commissions.

3. In general they do not maintain inventories. One of the functions they perform is to place
orders, in addition to making collections and sending cash to the headquarters. There
are cases in which they maintain a batch of merchandise or samples of the products
they distribute, however they normally do not belong to them, but are delivered to them
on consignment with the parent company.

ADVANTAGES AND DISADVANTAGES

This type of growth represents a good option for many companies, since it does not represent a
significant amount of fixed expenses, nor additional costs for investment in facilities or
construction: the commission represents a variable cost of sales for the parent company and is
used by companies like Avon, Tupperware and others. The commercial commission is also used
successfully by many distributors of automotive parts, computer equipment, products, doctors,
chemicals, etc.

Many companies usually hire their commission agents as if they were employees, subject to a
variable salary. Some of the disadvantages of this system are due to the fact that it is not
possible to use it for all types of products on the market, in addition to the fact that it creates a
 FINANCIAL ACCOUNTING 35

large amount of portfolio, etc.

CONTROL

The parent company must keep an accounting control of the sales, costs and, where
appropriate, the expenses of each agent, in order to calculate the commissions of each of them,
as well as incentives for the volume of sales, compensation, statistical information, etc

The amount of freight, insurance and other expenses incurred in sending the goods to the
agents must be accounted for by the parent company as a sales expense.

ACCOUNTING RECORD OF THE HEAD OFFICE

Company A is dedicated to the sale of personal care products. During the month of January, I
entered into contracts with two agents for the distribution of their products. The contract specifies
that the parent company will invoice its products directly to the final buyer, granting the agent a
20% commission on its sales. This commission will be deducted directly from the collection, prior
to the deposit that it will make to the account of the parent company.

The expenses for freight and shipping of merchandise to agents are $600.00 for A and $400.00
for B will be absorbed by the parent company.

The agents' sales were as follows:

AGENT AT $125,000.00

AGENT B $190,000.00

The cost of merchandise for the parent company represents 40% of the retail price

ACCOUNTING OF THE HEAD OFFICE

CUSTOMERS AGENTS 315000

Agent A 125000
Agent B 190000

COST OF SALE OF
AGENTS 126000
Agent A 50000
Agent B 76000
 FINANCIAL ACCOUNTING 36

AGENT SALES 315000

STORE 126000

For the freight costs caused by the AGENT B

shipment; BANKS
1000
SELLING EXPENSES OF
600
AGENTS
400
AGENT A
1000

For him he sent the collection by the agents to the headquarters:

BANKS 252000
UNIT I.............................................................................................................................1
GOALS.......................................................................................................................1
ACCOUNTING: Definition........................................................................................2
COMPONENTS OF THE ACCOUNTING SYSTEM...............................................2
FINANCIAL ACCOUNTING................................................................................2
COST ACCOUNTING...........................................................................................3
MANAGEMENT ACCOUNTING.........................................................................3
DIFFERENCES BETWEEN FINANCIAL ACCOUNTING AND...........................3
MANAGEMENT ACCOUNTING............................................................................3
6...............................................................................................................................3
USERS OF ACCOUNTING INFORMATION FOR DECISION MAKING............4
We can speak in general terms that the users of the financial statements would be
internal and external:...............................................................................................4
Creditors or potential creditors: your interest is...................................................4
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES GAAP.....................5
THE ACCOUNTING EQUATION............................................................................7
ASSETS = SHARES...............................................................................................7
ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY...................................7
IMPACT OF THE TRANSACTIONS ON THE BALANCE SHEET:..................8
ASSET = PASSIVE...........................................................................................8
+ SHAREHOLDERS' EQUITY..........................................................................8
FINANCIAL STATEMENTS....................................................................................9
ACCOUNT TYPES....................................................................................................9
 FINANCIAL ACCOUNTING 37

DEBIT AND CREDIT..............................................................................................10

EVERY DEBIT GENERATES.............................................................................10
ALL CREDIT GENERATES................................................................................10
ANALYSIS AND RECORDING OF OPERATIONS IN THE JOURNAL BOOK
...............................................................................................................................11
RECORD OF OPERATIONS IN THE GLOBAL BOOK...................................11
EXERCISES:.........................................................................................................14
UNIT II......................................................................................................................15
AIM............................................................................................................................15
CORPORATE ACCOUNTING................................................................................16
COMPANIES............................................................................................................16
GENERAL FEATURES.......................................................................................17
COMPANY IN COLLECTIVE NAME...................................................................17
APPLICATION EXERCISES...............................................................................18
GUACHO CEVALLOS CIA................................................................................18
CONTRIBUTION TABLE...................................................................................18
EXERCISES 2.......................................................................................................19
SIMPLE LIMITED COMPANY..............................................................................20
EXERCISES..........................................................................................................20
LIMITED LIABILITY COMPANY.........................................................................21
BASIC CHARACTERISTICS..............................................................................21
PARTNERS...........................................................................................................21
CAPITAL..............................................................................................................22
ADMINISTRATION............................................................................................22
LIMITED COMPANY BY SHARES......................................................................22
EXERCISE............................................................................................................22
COMPANY IN CORPORATION............................................................................24
CHARACTERISTICS OF THE LIMITED COMPANY.....................................24
MIXED ECONOMY COMPANY...........................................................................25
EXERCISES..........................................................................................................25
CONTRIBUTION TABLE...................................................................................26
MERGER OF COMPANIES....................................................................................28
CHARACTERISTICS OF THE FUSION ...........................................................29
TYPES OF FUSION.............................................................................................29
 FINANCIAL ACCOUNTING 38

LEGAL ASPECT..................................................................................................29
DISSOLUTION OF COMPANIES......................................................................30
CONCEPT.............................................................................................................30
LIQUIDATION OF COMPANIES.......................................................................30
CONCEPT.............................................................................................................30
TECHNICAL BANKRUPTCY OR EXTRAJUDICIAL LIQUIDATION..........30
SOLVE..................................................................................................................30
EVALUATION ACTIVITIES..............................................................................32
UNIT III............................................................................................................................33
AGENCIES...............................................................................................................34
CONCEPT.............................................................................................................34
CHARACTERISTICS OF THE AGENCIES.......................................................34
ADVANTAGES AND DISADVANTAGES.......................................................34
CONTROL............................................................................................................35
ACCOUNTING RECORD OF THE HEAD OFFICE..........................................35
CUSTOMERS AGENTS 315000.......................................................................35
COST OF SALE OF..............................................................................................35
AGENTS 126000................................................................................................35
AGENT SALES....................................................................................................36
STORE..................................................................................................................36
SELLING EXPENSES OF....................................................................................36
AGENTS...............................................................................................................36
BANKS..................................................................................................................39
BRANCH OFFICES.............................................................................................39
CHARACTERISTICS OF THE BRANCHES.....................................................39
TYPES OF BRANCHES......................................................................................40
LOCAL BRANCHES...........................................................................................40
Foreign Branches:..................................................................................................40
Investment account branch :..................................................................................41
Current account branch :.......................................................................................41
Investment account matrix :..................................................................................41
Current account matrix :........................................................................................41
Differences between Agency and Branch:............................................................42
Agencies................................................................................................................42
 FINANCIAL ACCOUNTING 39

Branch offices:.......................................................................................................42
Agency accounts:...................................................................................................42
Branch accounts:...................................................................................................43
BRANCH BOOKS................................................................................................44
HEAD OFFICE, CURRENT ACCOUNT............................................................44
EXERCISE............................................................................................................44
INTERNATIONAL FINANCIAL REPORTING STANDARDS........................46
REASONS FOR ADOPTING IFRS.....................................................................46
IMPLEMENTING IFRS IN ECUADOR..............................................................46
Current International Financial Reporting Standards (IFRS) issued by the IASB47
Current interpretations issued by the IFRIC..........................................................48
IAS 7 CASH FLOW STATEMENT.....................................................................49
PROJECT OF EVERY COMPANY.....................................................................49
OPPORTUNITIES................................................................................................49
CHALLENGES.....................................................................................................50
OBJECTIVES OF IFRS........................................................................................50
THE WHY OF THE CONCEPTUAL FRAMEWORK.......................................51
V J......................................................................................................................51

BANKS 315000

BRANCH OFFICES

The establishment of branches consists of creating extensions of the same company in those
places where operations are carried out with clients. From a legal point of view, the main
characteristic of branches is that they are an integral part of the same parent company and
operate under the same name or company name.

CHARACTERISTICS OF THE BRANCHES

The establishment of branches has the following characteristics:

1. Legally they are an extension of the parent company. As already mentioned, its legal
personality is the same as that of the parent company, due to which it administratively
depends on it.
 FINANCIAL ACCOUNTING 40

2. They do their own billing. Unlike what happens with agents, the sales made by the
branch are invoiced by itself, since the profits it generates contribute to increasing those
of the parent company.

3. By their nature, they have their own premises, maintain inventory and may or may not
keep their own accounting, which will be integrated from time to time into that of the
parent company.

TYPES OF BRANCHES

The branches established by a parent company can be of two types:

LOCAL BRANCHES

They are those located in the same city as the headquarters. The establishment of this type of
branches is due to the fact that sometimes it is difficult for the customer to go to the
headquarters facilities, due to the distance or difficulty in reaching it.

One of the accounting advantages of these branches is that due to their proximity it is possible to
centralize the information generated by each of them on a daily basis to the headquarters, as
well as cash cuts. It also simplifies the replacement of sold merchandise, thanks to which the
branch does not need to make direct purchases from suppliers or manage checking accounts.
From a financial point of view, this is healthy because it avoids very high balances in banks and
in inventories. This is healthy because it avoids very high balances in banks and inventories.

In each branch of the headquarters you must keep track of the following aspects.

• Goods in stock
• Profits or losses generated
• Other elements to consider necessary

Foreign Branches:

Foreign branches are used when you want to cover markets located outside the town where the
headquarters is located. Here the branches function in a similar way to the local ones, although
the distance that separates them from the main office allows and sometimes makes greater
independence necessary.

These types of branches require a cash fund for their operation, they carry out their own control
of their portfolio and sometimes make their own purchases in cases where it is more practical to
do so directly from suppliers instead of requesting remittances from the headquarters.
 FINANCIAL ACCOUNTING 41

Due to the distance, the daily centralization of accounting information is more difficult; one
solution is to communicate through a network of computers linked by modem, another is to use
the periodic sending of information through a courier service. When branch operations are too
voluminous, this daily sending of information is not

It is practical. In this case, it is most convenient for the branch to have its own accounting, and
send its accounting information to the headquarters from time to time.

To control operations in this type of branches, the following accounts are managed:

AT THE HEADQUARTERS:

Investment account branch :

It is used to record the amount of goods that are sent to the branch for its establishment, as well
as the expenses incurred to start its operations. The branch balance serves the head office as a
control of the investment made in the branches and as a parameter to measure the performance
of each of them based on the investment made. 6

Current account branch :

After the creation of the branch, it is normal for transactions representing current accounts to
occur between the headquarters and the branch. The characteristic of these transactions is that
they do not represent investments in the branch since they do not have the purpose of remaining
there.

At the branch:

Investment account matrix :

It represents the counter account used by the head office to account for the investments made in
the branches. It is the equivalent of the capital with which it operates, for which its nature is
creditors.

Current account matrix :

It is the counter account used by the head office for checking accounts with the branch. Its
nature can be debtor or creditor, but always with the same balance and different sign than the
parent company.
 FINANCIAL ACCOUNTING 42

Differences between Agency and Branch:

Agencies

They have an assortment of samples for customers to view, but do not maintain stock to deliver
to customers. The orders are sent to the head office and this is the one that serves them. The
credits are granted by the parent company, the accounts receivable are kept in the books of the
parent company, the latter makes the collections.

The fixed fund for the agency's expenses is provided by the headquarters, which replenishes it
as it is depleted. The agency does not handle any other cash.

Branch offices:

Maintains stocks of merchandise, most of which are obtained at headquarters, but some of
which may have been purchased from other entities. Deliveries are made from the branch's
stock.

The loans are granted by the branch; accounts receivable are kept on the branch's books; It
makes the payments.

Collections made by the branch are deposited in a local bank for credit to the branch; The
branch manager writes checks to pay expenses.

An agency performs the same functions, but more or less, as a salesman, while the branch
performs most of the functions of an independent company, subject only to the inspection and
control of the parent company.

Although there are agencies and branches, there are other establishments that have some of the
characteristics of both. Agencies that perform some of the functions of branches, and branches
subject to some restrictions that apply to branches.

If an agency performs any of the functions of a branch or if a branch is subject to any of the
restrictions that generally apply to agencies, its accounting systems are necessarily modified to
adapt to the situation.

Agency accounts:

An agency does not need to maintain a double-entry accounting system. The only thing you
need is a cash book in which you record the money received from the headquarters for your
fixed fund, and the payments made with it for your expenses. The payment record is usually kept
in duplicate. When the fixed fund decreases and a check is desired to replace it, a copy of the
payment sheet is sent to the headquarters, along with the supporting documents as evidence of
 FINANCIAL ACCOUNTING 43

the correct nature of the disbursements made, and the copy remains in the possession of the agency. 7

The entries to be made by the parent company will depend on whether management wishes to determine
net profits.

Branch accounts:

This is more complicated than that of the agencies. It maintains a complete set of books in which it
records merchandise received from the parent company and those acquired from other entities, sales,
accounts receivable, accounts payable, and expenses. The ledger contains an account called
Headquarters, to which everything that is received from the headquarters is credited and debited from
what is sent to it.

When goods are invoiced to the branch at the sales price, the accounting procedures are the same,
however instead of reducing the branch's inventory from the cost price by a percentage that is based on
a uniform markup rate, they must apply different departmental surcharges for that calculation, or make an
individual calculation for each item of the branch inventory.

The fixed assets of the branches are normally kept in the books of the head office.

Some of the expenses applicable to the operations of the branch may appear in the books of the
headquarters instead of appearing in those of the headquarters. After accounting for the profits as
presented by the branch, the parent company must make the entries in its books charging the branch's
Net Income or Loss and crediting Depreciation Expense.

ACCOUNTING RECORD

BOOKS FROM THE HEADQUARTERS

BRANCH X, CURRENT ACCOUNT

It loads

V For cash, merchandise, furniture, etc. Let the head office send it to the branch.
V For payments to third parties that the head office makes on behalf of the branch.
V For the net profits in the branch

It is paid

V For remittances in cash, merchandise, etc., that the branch makes to the headquarters.
V Payments to third parties that the branch makes by order and account of the head office

V For the net loss in the branch

The normal thing is that this account has a debit balance, which represents the net investment that the
7
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 FINANCIAL ACCOUNTING 44

main house has in the branch increased by the profit at the end of the year.

BRANCH BOOKS

HEAD OFFICE, CURRENT ACCOUNT

It recharges

V For all remittances of cash, merchandise, etc., that the branch sends to the headquarters.
V For payments made to third parties by order and account of the parent company
V For the net loss in the branch

It is paid

V For money, merchandise, furniture, etc. That the head office sent to the branch
V For payments to third parties that the head office makes on behalf of the branch
V For the net profits in the branch

Its credit balance represents what the parent company has invested in the branch, increased or
decreased by the results of the year.

The head office account will represent the capital account

EXERCISE

To exemplify the operations of a branch with shipments of merchandise at the head office's cost, the
operations of one month of registration are presented below.

V The head office sends money to branch A in the amount of $30,000 for its operation
V Goods are sent for sale with a cost of $60,000, the sales price policy is to obtain a gross profit
margin of 40%
V The credit sales of the branch were $50,000
V The branch acquired merchandise for sale with a sales cost of $20,000
V Customers were charged $28,000 from credit sales
V Merchandise purchased locally at a cost of $12,000 was sent to the head office.
V The branch had expenses of $8000
V The branch sent $10,000 to the headquarters
V The branch received a debit note from the headquarters for $2,000 of expenses that it settled on
its own.
 FINANCIAL ACCOUNTING 45

The record of operations is as follows

BRANCH BOOK
HEADQUARTERS OFFICE BOOK

SEAT HAS TO TO HAVE SEAT HAS TO TO HAVE

1
SUC CURRENT 30000 BANKS
ACCOUNT 30000
BANKS 30000 CTA CORR MATRIX
30000
2
SUC CURRENT 60000 STORE 60000
ACCOUNT
STORE 60000 CTA CORR MATRIX
3 60000

CUSTOMERS 50000
SALES
50000

CTO D SALES 30000

STORE
30000

4 STORE 20000
BANKS
20000
5
BANKS 28000
CUSTOMERS
28000
6
STORE 12000 CTA CORR MATRIX 12000
SUC CTA CUT 12000 STORE
7 12000

SALES GTO 8000

BANKS
8000
8
BANKS 10000 CTA CORR MATRIX 10000
SUC CTA CUT 10000 BANKS
10000
9
SUC CTA CUT 2000 SALES GTO
2000
BANKS 2000 CTA CORR MATRIX
2000
 FINANCIAL ACCOUNTING 46

INTERNATIONAL FINANCIAL REPORTING STANDARDS

Currently, global capital markets have no borders and those who

wish to participate in them cannot have barriers to accessing
financial information, which needs to be of high quality, transparent
and comparable to make well-informed economic decisions.

IFRS or IFRS for its acronym in English, are a compendium of

accounting standards that are rapidly gaining acceptance
worldwide. Its adoption not only affects the accounting and tax
aspects of a company but also impacts areas such as human
resources, technology, treasury, contracts and other processes.

REASONS FOR ADOPTING IFRS

This IFRS replaces SIC-8 Application, for the first time, of IAS as an accounting basis. The Board has
developed this IFRS to respond to concerns about:8

a) Some aspects of the requirement contained in SIC-8 related to complete retroactive adoption, since it
caused costs that exceeded the possible benefits for users of the financial statements. Furthermore,
although SIC-8 did not require retroactive adoption in cases of practical impossibility, it did not explain
whether the entity first adopting IAS (or the first-time adopter) should interpret this practical impossibility
as the existence of a major obstacle. or if the appearance of a small obstacle was enough, and it did not
specify any alternative treatment in the event of not being able to carry out a complete retroactive
application.

b) SIC-8 could require that an entity adopting IAS for the first time apply two different versions of a given
Standard if a new version of the Standard is issued during the years covered by its first financial
statements prepared in accordance with IAS. , provided that the new version prohibited its retroactive
application.

c) SIC-8 did not clearly establish whether the first-time adopter should self-interestedly use a preventive
criterion when retroactively applying recognition and assessment decisions.

d) There were doubts about how the SIC-8 interacted with the transitional provisions

contained in the individual Standards.

8 http://www.monografias.com/trabajos52/processes-nic-niif/processes-nic-niif2.shtml#reasons
 FINANCIAL ACCOUNTING 47

IMPLEMENTING IFRS IN ECUADOR

Today, the most authoritative source on accounting principles worldwide is the International Accounting
Standards Board (IASB). Broadly speaking, the primary mission of the IASB is to develop, in the public
interest, a high-quality, understandable set of IFRSs for general purpose financial statements.

The IFRS will be developed following a process of international consultation, stakeholders and the
participation of organizations from around the world and with the support of an external advisory board,
the Standards Advisory Committee. The IFRS Interpretations Committee develops guidance to encourage
continued practice. This set includes:

• The 8 International Financial Reporting Standards

• The 41 International Accounting Standards IAS issued;

• The interpretations originated by the International Interpretations of Financial Reporting

committee.

Current International Financial Reporting Standards (IFRS) issued by the IASB

IFRS 1 Adoption, for the First Time, of International Reporting Standards

IFRS 2 Share-Based Payments
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration and Evaluation of Mineral Resources
IFRS 7 Financial Instruments: Information to be Disclosed
IFRS 8 Operating segments
IFRS 9 Financial Instruments _________________________________________________
 FINANCIAL ACCOUNTING 48

Current interpretations issued by the IFRIC

IFRIC 1 Changes in existing liabilities due to dismantling, restoration and similar

IFRIC 2 Contributions from members of cooperative entities and similar instruments
IFRIC 4 Determination of whether an agreement contains a lease
IFRIC 5 Rights for participation in funds for environmental dismantling , restoration and rehabilitation
IFRIC 6 Obligations arising from participation in specific markets - Waste electrical and electronic
equipment
IFRIC 7 Application of the restatement procedure according to IAS 29 Financial reporting in
hyperinflationary economies
IFRIC 8 Scope of application of IFRS 2
IFRIC 9 New Assessment of Embedded Derivatives
IFRIC 10 Interim financial information and impairment
IFRIC 11 IFRS 2 - Group and Transactions with treasury shares
IFRIC 12 Service concession agreements
IFRIC 13 Customer loyalty programs
IFRIC 14 IAS 19 - The limit of a defined benefit asset , minimum level of
financing and its interaction
IFRIC 15 Agreements for the construction of real estate
IFRIC 16 Hedges of net investment in a foreign business
IFRIC 17 Distributions of non-cash assets to owners
IFRIC 18 Transfers of Assets from Clients
IFRIC 19 Cancellation of Financial Liabilities with Equity Instruments

DUTY

MAKE A EXHIBITION IN
GROUPS OF 5 PEOPLE ON
IFRS
 FINANCIAL ACCOUNTING 49

IAS 7 CASH FLOW STATEMENT

There are two methods to prepare the cash flow statement; the direct method and the indirect method, but
companies can use either of the two: For practical purposes, the indirect method is usually used, because
it is easier to prepare.

The difference between the two methods is based solely on the presentation of the operation flow. The
other flows are exactly the same. To prepare the direct method, the accounts of the Comprehensive
Income Statement are analyzed and it is verified whether they are cash outflows or inflows. The indirect
method starts from the profit of the year and adds items that do not represent cash outflows, such as;
depreciation and amortization, plus variations in working capital.

SEE: AN EXERCISE OF IAS 7

PROJECT OF EVERY COMPANY

IFRS in the world, the need to design and adopt a

single set of standards for the different markets in
the world is implicit, considering the volume of
transactions and information that is shared between
different countries. Converting to IFRS is not just a
technical exercise limited to changing from one
system of accounting principles to another
(valuation and monitoring of biological assets,
instruments, derivatives, taxes, monetary
correction).

According to IFRS, they are projects, in themselves,

that will affect the different areas and structures of the organization.

They must be implemented in companies, experience tells us that the conversion will affect many aspects
of a company and its environment, such as accounting, management reports, external financial reports,
both internal and external communications, information systems and human Resources.

OPPORTUNITIES

• Improvement of the relationship between the finance area and the operational areas.
• A common financial language
• Stronger internal control
 FINANCIAL ACCOUNTING 50

CHALLENGES

• More Transparency
• Performance measurementsfurther complex (outcome measurements)
• Resources and Deadlines
• Capitalization of Opportunities

DEPARTMENTS INVOLVED IN IFRS IMPLEMENTATION

Functions affected by the transition to N IIF

MII NIC ST Provisions
Cumblase Policies My 13 Mine IFRS1
Accountants, NIL If Properties, imposed on IAS 2 Ceteriore del Valer IAS 17 Leases
NIG 31 and Assets v IAS 11 iingrmins
First adoption see 0»
Furcienesi Standards ^IMU and Equip
Aetives fiffksk
Estimates and Las Greenhouses M Aetivos Imtangibis Liabilities
Canantias Contingents
IFRS

and"
Rocursa Humans
ftln-
ataio i Cotranzas —4-
Marketing and Sales to" -- -- v v

ProducddneltD v-"t- forks- and*-- "we"

Alia Administradón
ai- wa-"ish Yo-- and" yadt
LegalyTnbuario and-" already wa-*i gad--. v- already* y-"i

_e=-- w-"s "- Wa" yt- mn- saw

lymphomacon systems

Shortability, Finance
yi*
yes - to*- -- to ace vait TO
Elaboration; Hansen-Holm & Co

MANAGEMENT OF MANAGEMENT PROCESSES IN COMPANIES

OBJECTIVES OF IFRS

• Establish action guidelines for consistent use in the preparation of the Financial Statements, so
that:
• The different users of such information have a frame of reference so that they can interpret the
information contained therein.
• To adopt planning, control, investment and financing decisions, depending on the objectives
pursued by each of the users.
 FINANCIAL ACCOUNTING 51

THE WHY OF THE CONCEPTUAL FRAMEWORK

The Conceptual Framework provides the bases for the Financial Statements to satisfy the information
needs of their different users, meet the objectives of said information and the definition of the elements
that make up the Financial Statements, the recognition and measurement of these elements.

The conceptual framework defines the essential concepts related to the preparation and presentation
of Financial Statements for external users, with the purpose of helping or facilitating. The issuance and
review of the standards and procedures related to the presentation of financial statements. Application
to Accounting standards. The preparation of Financial Statements, the application of accounting
standards, as well as the treatment of matters that have not yet been the subject of an accounting
standard.

( NOTE : AFTER EACH UNIT A QUESTIONNAIRE WITH EXERCISES WILL BE GIVEN TO REINFORCE
THE INDICATED TOPICS

V J.

_______________________£
ACTIVITIES OF
ASSESSMENT

• Write the characteristics of an agency

• What is an agency? • What are the advantages and disadvantages
• What is a branch
• What does local branches refer to?
• What are foreign branches?
• What accounts are involved in a matrix and

branch