Accounting ABC – What are the General Accounting Principles?

Whether you follow GAAP or IFRS accounting the basic principles are the same. One being more of a principles-based accounting standard and GAAP, being more rules-based. Either way the basic accounting concepts incorporate a chart of accounts in order to produce the annual accounts at your year end which consist of Management accounts, Income Statement and Balance sheet.

When working with business accounting, it is advisable to always have a General Accounting Plan on hand to be able to make inquiries in case of specific doubts. In today’s article we will focus on the definition and use of the Chart of Accounts, which is essential to perform the accounting of any company.

What is the Chart of Accounts?

The Chart of Accounts includes the list of accounting accounts (numerical codes) that we recommend to use in the register of the operations that occur in the company.

Each numerical code or accounting account identifies a type of operation. For example, if you want to register in your accounting a movement in your bank account, either an income or a payment, you will have to use the code or bank account in a generic way.

Is it mandatory to follow the Chart of Accounts?

As we have already mentioned, the Chart of Accounts is a recommendation that most companies follow. Thus, the accounting methodology and the use of the different accounting accounts is somewhat widespread in all companies.

The advantage that it is not strictly mandatory allows each company to create new accounts or sub-accounts, so that the company’s accounting is “personalized” and tailored to the company needs or deems more convenient.

There are some adaptations of the chart of accounts for different business sectors, such as non-profit entities or cooperatives.

Composition of the Chart of Accounts

The Chart of Accounts or Accounting Plan is divided into Groups. Each Group collects a series of accounting accounts or numerical codes that identify specific operations. The Groups are:

Group 1. Basic financing

Group 1 collects the accounts that refer to net worth and long-term foreign financing, normally intended to finance non-current assets and cover a portion of current assets.

Some of the most important and used accounts within this Basic Financing group are:

Share capital
Reserves
Negative results from previous years
Result for the year
Long-term debts with credit institutions

Group 2. Non-current assets

This group includes assets not intended for the production process and which will be in the company for a long time, more than one year. The assets or assets of the company are included, as well as financial investments whose maturity, disposal or realization is also expected in the long term.

Some of the most important and used accounts within this Basic Financing group are:

Computer applications
Machinery
Furniture
Information process equipment, IP
Accumulated depreciation of intangible assets
Accumulated depreciation of property, plant and equipment

Group 3. Stocks

Here we find the accounts that identify the assets of the company that are expected to be sold in the natural cycle or that will be used for production, whether they are raw materials or supplies that will be consumed during the production process.

Some of the most important and used accounts within this Basic Financing group are:

Stock
Raw materials
Products in progress
Semi-finished products
Finished products

Group 4. Creditors and debtors for commercial operations

Within this group the rights and obligations that the company has with third parties are collected, originated by the company’s own activity. Likewise, we can find the obligations or rights with the Public Administration.

Some of the most important and used accounts within this Basic Financing group are:

Suppliers
Creditors
Customers
Debtors
Public Treasury, debtor for various concepts
Public Finance, VAT supported
Public Finance, creditor for tax concepts
Public Finance, Output VAT

Group 5. Financial accounts

Here we find the financial instruments of the company for non-commercial operations. They would be the financial rights and obligations with a maturity term not exceeding one year. Available financial resources are also included here.

Some of the most important and used accounts within this Basic Financing group are:

Short-term debts with credit institutions
Short-term fixed assets providers
Short-term debt interest
Cash
Bank

Group 6. Purchases and expenses

All expenses for the year, including materials to be consumed and service purchases, changes in inventories and other expenses and losses for the year.

Some of the most important and used accounts within this Basic Financing group are:

Merchandise purchases
Stock variations
Leases and fees
Services of independent professionals
Supplies
Income tax
Wages and salaries

Group 7. Sales and income

All income for the year. Disposals of goods and provision of services that are part of the production process of the company, as well as other income, changes in stocks and benefits of the year.

Some of the most important and used accounts within this Basic Financing group are:

Merchandise sales
Stock changes
Other financial income
Exceptional income

We hope this information can help you understand accounting a little better. The next ABC Accounting blogs will teach you even more to become an accounting expert.