People who have a business in which they provide services, have a production company, or carry out any commercial activity must keep a continuous record of economic activity, which is why it is necessary to implement a type of guideline that allows having the necessary information for the evaluation of your entity.
Accounting information must serve essentially to:
- Know the resources, obligations, and results of the company’s operations.
- Support users of this in the planning, organization, and administration of business activity.
- Evaluate the management of administrators.
- Make short and long-term decisions.
- Establish obligations with the state.
- Set control operations.
- Evaluate the social impact of the company.
Accounting information must have certain types of qualities that meet the needs of users, it must be understandable, useful, clear, pertinent, reliable, timely, neutral, verifiable, and comparable and must faithfully represent the economic facts of the company.
The economic events must be documented by internal or external media, duly dated, and authorized by those responsible for their preparation.
Basic rules that contain accounting information:
Economic entity: This is the company, it has to do with the economic activity organized as a unit, in respect of which the resources are controlled. It must be distinguished and defined as an entity different from the others.
Continuity: The company must specify the duration of operation and operation, if not, it must be expressed in the notes. An entity may close when:
- You experience ongoing losses, working capital deficiencies, or negative cash flows.
- Does not comply with obligations, cannot access credit, and has constant refinancing.
- Legal sanctions, strikes, or natural contingencies are imposed.
Unit of measure: All resources and economic events must be expressed in the same unit of measure, understood as the functional currency of each country in which the company operates.
Period: The company must prepare financial statements during its existence. According to legal provisions, entities must submit this information at least once a year.
Measurement and Valuation: All economic facts must be quantified in the unit of measure and according to the legal provisions of each country, establish the valuation criteria, in this case, we have:
- The historical value is that which represents the original amount consumed at the time of the realization of an economic event.
- The current or replacement value is the one that represents the amount in cash or its equivalent, which would be consumed to replace an asset or would be required to settle an obligation at present.
- The realization or market value is that which represents the amount in cash or its equivalent, into which an asset is expected to be converted or a liability settled.
- The present or discounted value is that which represents the current amount of the net inflows or outflows that an asset or liability would generate, once its future value has been discounted at the agreed rate.
Financial statements are the primary means of providing accounting information to those who do not have access to a company’s records.
Essence over form: The economic facts must be recognized according to their essence or economic reality and not only in their legal form.
Realization: Only realized economic events can be recognized. This means that the fact can be verified, as a result of past transactions or events in which there will be a change in resources or an economic sacrifice.
Association: The costs and expenses must be associated with the income of each period since these are the ones that give the certainty of the economic benefits or sacrifices.
Patrimony maintenance: It is understood that the company obtains profits from its operation, which is why an evaluation of the financial (contributed) and physical (operating) patrimony must be made.
Full disclosure: The economic entity must fully report all the information produced by the economic activity so that it can be correctly evaluated and analyzed to specify the financial situation, changes in equity, the result of operations, and the capacity to generate positive cash flows.
The relative importance of materiality: An economic fact is considered material when its knowledge or ignorance can substantially alter the decisions of the users of the information. When preparing the financial statements, materiality must be determined by the relationship it has with total assets, current assets, total liabilities, current liabilities, working capital, equity, or results for the year, as appropriate.
Prudence: When a realized economic fact cannot be measured reliably and verifiably, the option that is least likely to overestimate assets and income, or underestimate liabilities and expenses, should be chosen.
The practice of the activity: Seeking in any case the satisfaction of the qualities of the information, accounting must be designed taking into account the limitations imposed by the characteristics and practices of each activity.