Accounting Equities and Assets

• Economic and financial resources needed for an activity equal equity.
• Changes in wealth over an economic period are equal to the result.
• Equity is a collection of goods, rights, and obligations that can be expressed in monetary units and are accounted for by an economic entity at a specific point in time for business development.
• Equity items = Assets + Rights - Obligations
• Equity masses include assets, liabilities, and net worth.
• Assets are a group of goods and rights that provide the expectation of future returns.
• Assets include resources economically controlled, results of past transactions, contributions to profit generation, and valuation potential.
• Asset requirements include the likelihood that future returns will materialize and a reasonable estimate of cost or value with reliability.
• Liabilities are obligations to deliver money, goods, or services to third parties.
• Liability requirements include representing a current debt, arising from past transactions, implying the disposal of an asset/resource in the future, and being susceptible to quantification.
• Net worth is the result of subtracting liabilities from assets.

Basic accounting equation

• Assets = Liabilities + Net Worth
• A company finances itself with resources from third parties (liabilities) and from its owners (net worth), which are invested in assets needed to operate and achieve goals.

Equity masses

• Balance sheet includes assets, liabilities, and net worth.
• Assets are divided into non-current and current.
• Liabilities are divided into non-current and current.

Asset ordering

• Non-current assets include intangible assets, tangible assets, real estate investments, investments in group companies and associates (long-term), long-term financial investments, and deferred tax assets.
• Current assets include inventories, debtors, short-term financial investments, and treasury.

Liability ordering

• Non-current liabilities include long-term provisions, long-term debt, debt with group companies (long-term), deferred tax liabilities, and long-term deferrals.
• Current liabilities include short-term debts, debts with group companies (short-term), trade creditors and other accounts payable, and short-term deferrals.

Net Equity

• Net worth contains equity and subsidies, donations, and bequests.

Working Capital (WC)

• This is the portion of current assets financed with permanent resources.
• WC = Current Assets (CA) – Current Liabilities (CL)
• WC = Net Worth (NW) + Non-Current Liabilities (NCL) – Non-Current Assets (NCA)

Financial stability

• Maximum stability is when WC > 0, CL (current liabilities) = 0, and NCA (non-current assets) + CA = Equity.

Regular financial situation

• In a normal situation, WC > 0 and NCL (non current liabilities) + NW (net worth) > NCA (non current assets).

Instability

• Instability is defined as WC < 0 and NCA (non current assets) > NCL (non current liabilities) + NW (net worth).

Bankruptcy

• Bankruptcy is defined as NW (net worth) < 0.

Profit and Loss (P&L) Account

• This is one of the reports or documents that make up a company's annual accounts, collecting revenues and expenses for an accounting year.
• The P&L account determines a company's profit or loss during a period (quarter, semester, or full year).
• Calculation involves adding all revenues from activity and subtracting all associated expenses.
• It is presented as a list of income and expenses classified by nature. Income and expenses must be classified according to their nature.

Accounting Facts

• These are events that significantly affect a company's assets in a concrete and direct way, including transactions with economic consequences like buying machinery or selling inventory.

The Account

• This is a tool for representing and measuring an asset item, capturing its initial state and subsequent changes.
• There are two types of accounts: balance sheet accounts and profit and loss accounts.
• Balance sheet accounts refer to asset items (assets, liabilities, and net worth).
• Profit and loss accounts relate to the result (income and expenses).

Balance Sheet Accounts

• Asset accounts increase on the debit side and decrease on the credit side.
• Liability accounts originate and increase on the credit side and decrease on the debit side.
• Net worth accounts originate and increase on the credit side and decrease on the debit side, similar to liability accounts.

Account Terminology

• Opening an account involves assigning a title and code to represent an equity item, including its initial value.
• An accounting entry records an economic transaction, selecting the relevant accounts.
• Debiting an account: Making an entry on the debit side.
• Crediting an account: Making an entry on the credit side.
• Debit balances are the sum of entries on the debit side of an account.
• Credit balances are the sum of entries on the credit side of an account.
• The balance is the difference between debit and credit totals i.e. the difference between the sum of the charges and credits.
• To balance an account, the balance is entered on the side with the smaller total to equalize the debit and credit sides.
• Closing an account includes totaling both sides after balancing.

Double-Entry Accounting

• Each accounting event affects at least two accounts with equal amounts so each one contains two parts that vary in the same amount.
• There is no debtor without a creditor.
• Every debit entry corresponds to one or more credit entries.
• The sum of debits always equals the sum of credits.

Accounting Entries

• These are records reflecting economic operations performed by a company in a specific period.
• Each accounting entry is recorded in the general ledger and then transferred to the ledger.
• An accounting entry consists of the date of the operation, debit and credit accounts (reflecting the principle of double-entry bookkeeping), a brief description of the operation, and the amounts in the corresponding debit and credit columns.

Ledger

• It is also known as the accounting or general journal, it is a financial record where all company transactions are recorded in chronological order.
• Each transaction is recorded in terms of debit and credit, with a brief description.
• The purpose is to maintain a full and detailed historical record of all financial transactions.

General ledger

• This reflects the operations that occur and are recorded in the general ledger for each of the accounting accounts.
• There is a ledger for each account used in accounting, showing the transaction details, debits, credits and the account balance.
• Operations are recorded chronologically, The balance remaining in each account after the recorded transactions can be seen.
• The Ledger shows all the operations of a company meanwhile the General Ledger shows only the movements of a specific concrete account.