ACCOUNTING (Second Term Test)

All of us make economic decisions throughout our lives as members of

families, of groups, and of our society as a whole, as employees and
employers, and even as club members. Not one of these decisions can be
made without financial information. Such economic decisions must be based
on appropriate financial facts communicated in some meaningful form.
Accounting is the service that provides such facts.

Definition of accounting
Accounting is the systematic recording and analysis of financial transactions
of a business. It is a service that provides the facts needed to make informed
economic decisions. It involves recording and summarizing an
organizations transactions or business deals, such as purchases and sales,
and reporting them in the form of financial statements.
Bookkeeping: many people confuse accounting with bookkeeping, which is
only a small subpart of accounting. Bookkeeping is only the beginning of the
accounting service and it is the day-to-day recording of financial transactions.
Accountants use that information in preparing financial reports on which
decisions are based.
Definition of finance
It is the study of concepts, applications and systems that affect the wealth of
individuals, companies and countries over a short and a long-term.
Jobs in Accounting
Trainee accountants: accountant who are studying for professional
examinations
External auditors: people employed by an outside firm of accountants
and fired by a company to inspect its accounts
Bookkeepers: administrative staff responsible for processing the
records of a businesss financial activities
Back-office manager: person in charge of the staff responsible for
giving administrative support to the Finance department
Internal auditors: employees of a company who are responsible for
inspecting its accounts
Controller/comptroller: person who supervises the quality of
accounting and financial reporting of an organization
Tax accountant: an accountant specializing in a companys tax affairs
A BIT OF HISTORY

Accounting had its origins in the Egyptian era. The system applied was known
as single-entry accounting because people used a single list enumerating
the assets that they owned.
However, many centuries later during Renaissance, a new system emerged in
North Italy: the double-entry accounting system. Two entries were used,
and both the assets that a person had and the assets that a person owed were
listed on that each entry respectively.
Double-entry accounting: it is used nowadays to record all the transactions
entered into by a business entity and it must have at least two accounts: one
on the left-side and another on the right-side.
Account: it is the most important concept of accounting/the basis of
accounting because it is impossible to organize all the financial information
without an account. When a company is created, all the names of the accounts
that are going to be used to record all the transactions must be taken into
account. No one can use an account that does not appear on the chart of
accounts (plan de cuentas).
USERS OF ACCOUNTING INFORMATION
Financial reports are used by managers, investors, creditors, etc. But the
principles underlying the gathering and presenting of accounting information
are basically similar for all economic entities.
ECONOMIC ENTITY: an organization that provides products or services. There
are two types of economic entities:

Business entities: profit-oriented economic entities, such as IBM,

Toyota.
Non-for-profit entities: those which are not concerned with making
profit.

However, we have studied only accounting for business entities.

Business entities and user groups
In any business entity, there are three groups of users of accounting
information related to that entity:
1) INTERNAL USERS: [people who belong to the company, and who
engage in the business]
a. Management group: includes individuals who own and/or
manage and control the business entity. The management group
makes decisions regarding how to make the company more
profitable, this is the reason for which it requires very detailed

information regarding every area of the company contained in

internal financial reports which are prepared by the area of
management accounting.
E.g.: the Board of directors; Partners; Officers; Managers;
Supervisors.
2) EXTERNAL USERS: [people who have an interest in the company, but
do not belong to it]
a. Financing group: supplies or can supply the money the
management group needs to run the business successfully.
It consists of investors, and potential investors; Creditors, and
potential creditors. And it may also include its owners or
stockholders, banks holding shares of stock in the business or
lending money to it, insurance companies looking for investments,
and the members of the general public who are considering
investing in the business entity.
b. Public group: includes all parties that have an interest in a
business entity but neither manage it nor provide it with financing.
E.g: Regulatory agencies (state agencies that are authorized to
control the activity of administrative agencies. E.g.: AFIP, IGJ),
such as Securities and Exchange Commission or Internal Revenue
Service; Taxing authorities; Labor unions; Employees (they are
interested in knowing about the future of the firm where they
work); Retirees; Economic planners; Customers (they are
interested in knowing whether to continue buying specific
products).
Types of financial reports
Financial information is provided to users in the form of reports. These reports
are used at the end of the year to prepare the financial statements (estados
constables).
External financial reports are prepared for those users of financial
information who do not have direct access to the business entitys
records.
These users are the IRS, the SERC, and the other governmental taxing
and regulatory authorities. These agencies prescribe the exact manner
in which the financial information is to be reported; what type of
information is to be reported; and when and where it is to be submitted.
However, users in the financing group and users in the public group
other than taxing or regulatory authorities do not have the legislative
power to require a business entity to report accounting information to
them. Therefore, it is up to the management group to see that the
information needs of the financing and public groups are met by
preparing GENERAL-PURPOSE FINANCIAL STATEMENTS and making
them available to nongovernmental users. These statements describe
the results of business activities for a specified period of time and list the

economic resources and obligations of the entity. The area of accounting

concerned with the preparation and presentation of these reports is
known as FINANCIAL ACCOUNTING.

Internal financial reports are prepared exclusively for the use of the
management group in order to help them make operating decisions to
meet the businesss goals. The management group needs much more
detailed accounting information in addition to its general-purpose
financial statements, to operate and control the business effectively and
efficiently.
The area of accounting that is concerned with the preparation and
presentation of INTERNAL REPORTING is referred to as
MANAGEMENT ACCOUNTING. These reports are for the exclusive use
of the management group. As the purpose of these statements is
internal planning and control, they will usually contain budgets,
strategies to reduce the cost of producing a certain item, the cost of
leasing an item, etc.

PREPARERS OF ACCOUNTING INFROMATION

Financial information about a business entity is provided by two groups:
management and certified public accountants. Whereas MANAGEMENT
prepares and is responsible for the financial information, CERTIFIED PUBLIC
ACCOUNTANTS (CPAs) assure the user that the financial information supplied
to them by management represents fairly the business activity over a period of
time and states fairly the resources and obligations of the entity at the end of
that period of time.

MANAGEMENT: the responsibility for the accounting information

contained in the financial reports of business and non-for-profit entities
ultimately rests with the entitys CEO (Chief Executive Officer), which
can be:
o the president or chairman of the Board of Directors of a
business entity
o the director, head, mayor, president or some other designee of
a non-for-profit entity.
The executive officer in charge of the accounting function of a business
entity is called the CONTROLLER, who may supervise a staff of several
hundred accounting and finance employees, as in the case of a large
international corporation, or a relatively small staff, as in the case of a
local retail store.
In some large companies, the controllers functions are performed by the
CHIEF ACCOUNTANT or the VICE PRESIDENT OF FINANCE.

CERTIFIED PUBLIC ACCOUNTANTS are independent professional

accountants, licensed by the state, who provide accounting services to
clients for a fee. In other words, they are individuals who have met the
educational and experience requirements prescribed by state law and
have passed the Uniform CPA Examination, which is prepared and
graded by the American Institute of Certified Public Accountants
(AICPA). Although all applicants must pass the same national test, each
state imposes a number of additional requirements, so if a candidate
wants to practice in a particular state, he must fulfill the requirements of
that state in particular to be granted a CPA license.
The major function of the CPA is to serve as a link between the
management that prepares financial statements and the people
who use the statements. Since external users of financial statements
(the financing and public groups) do not have access to the financial
records of the economic entity in which they are interested, they have no
way of ascertaining that the financial statements represent fairly and
honestly the results of operating activities and the firms resources and
obligations. So, these external users must rely on assurance from
someone else, and the CPA provides that assurance by performing
an independent AUDIT, which is a financial examination of the
firms records. The CPA issues a FORMAL AUDIT REPORT that is an
integral part of the financial statements prepared and issued by
the economic entity.

CAREERS IN PUBLIC ACCOUNTING

People are said to be in private accounting when they work for a single
enterprise; but accountants who offer their professional services to customers
for a fee are said to be in public accounting.

AUDITING: to assure users that the financial statements are presented

fairly and honestly, the CPA performs and independent audit, a review
of the accounting records of an economic entity by a CPA who is neither
employed by the entity nor related to any officer of the entity.
An audit does not cover 100% of the accounting records. Instead, the
CPA reviews a statistically selected sample of the records, then issues an
AUDIT REPORT.
An AUDIT REPORT declares that the financial reports issues by
the economic entity are stated fairly and are prepared in
accordance with generally accepted accounting principles.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

There is a need for some ground rules that all companies throughout the world
will apply when publishing financial statements. These ground rules used by
business entities in presenting financial information are called generally
accepted accounting principles (GAAP).
Financial reports must be prepared in specific ways so that they are reliable
and comparable. This is achieved by the use of GAAP.
These principles have been developed by the accounting profession over the
years to provide a consistent system of financial reporting in a constantly
changing business environment. GAAP encompass not only principles but also
various procedures for their application. For example, one accounting principle
holds that the price paid for a machine must be spread over a period of time,
the expected life of the machine. There are several accepted procedures for
applying this principle. But once a procedure has been selected, it must be
applied consistently over the years.
Accounting principles often change to meet the needs of emerging
and changing financial situations, so reports that provided adequate
financial information several years ago may not be adequate today.
Accounting principles are a blend of theoretical principles and
practical considerations. A theoretically sound solution to a particular
accounting problem may have certain practical limitations. The experience of
the members of the accounting profession will determine when a practical
rather than a conceptual solution to a problem is required.
Major developers of GAAP
The main agencies/groups that have been influential in developing generally
accepted accounting principles for the entire accounting profession are:

Financial Accounting Standards Board (FASB):

It was the group responsible for originating GAAP. These generally accepted
accounting principles. Called Statements of the Financial Accounting
Standards Board, must be followed by all business entities that issue
financial statements.
The European principles/standards are the mainly used nowadays.
Development
In 2001, the first agency that begun with the development of standards or
principles was the International Accounting Standard Committee (IASC)
or the International Accounting Standard Board (IASB). The standards
developed were the International Accounting Norms (IAN) Normas
Internacionales de Contabilidad (NIC).

Then, the FASB came into existence and it developed the International
Financial Reporting Standards (IASB). These European standards are
widely applied worldwide Normas Internacionales de Informacin
Financiera (NIIF).

American Institute of Certified Public Accountants (AICPA):

It is the professional organization representing certified public accountants on a

national basis. The AICPA is to the accounting profession what the American
Bar Association is to the legal profession.

Securities and Exchange Commission (SEC):

It is more or less similar to our CNV.

It is an independent, quasi-judicial agency of the federal government that
administers the various laws concerning the distribution and sale of publicly
held securities. Legal authority is vested in the SEC to require whatever
specific accounting practices it deems necessary to protect the public. Most of
the FASB standards have been accepted by the SEC, however, when the SEC
differs with the FASB, it may issue its own ruling, describing the additional
accounting information that must be reported to the SEC and perhaps also
must be presented in the annual reports to stockholders.
Business ethics
Ethics is concerned with the moral duties and obligations of individuals of
groups. In order to provide ethical guidance to accountants, both the IMA and
the AICPA have formulated codes of conduct for their members.
The six principles of professional conduct are:
1. In carrying out their responsibilities as professionals, members should
exercise sensitive professional and moral judgments in all their activities.
2. Members should accept the obligation to act in a way that will serve the
public interest, honor the public trust, and demonstrate commitment to
professionalism
3. To maintain and broaden public confidence, members should perform all
professional responsibilities with the highest sense of integrity.
4. A member should maintain objectivity and be free of conflicts of interest
in discharging professional responsibilities. A member in public practice
should be independent in fact and appearance when providing auditing
and other attestation services.
FIVE BASIC GAAPs

There are 5 basic and very important accounting principles that govern the
preparation of financial statements:
1. The cost principle: This principle specifies that assets acquired by a
business entity are to be recorded at the exchange price paid for
them. The price the buyer pays in exchange for an asset is known as the
historical cost, because once recorded it remains unchanged. It is
important to realize that the assets listed on the balance sheet are
measured in dollar amounts that represent the historical cost of those
assets, not what could presently be obtained from their sale.
2. The objectivity principle: The cost of an asset is established by an
exchange transaction between an informed buyer and an informed seller.
This principle requires that any independent party can confirm
the assets exchange price its historical cost- by simply
reviewing the information in the sale documents (such as
purchase invoices, sales invoices, property deeds and transfers of title).
The objectivity principle, which is based on and backed up by the sale
documents, establishes the reason for the cost principle, which is
recording the assets at cost.
3. The business entity concept: This principle establishes that a
business entity is considered to be separate and distinct from its
owner or owners. Thus, accounting treats each business entity as
generating its own revenue, incurring its own expense, owing its own
assets, and owing its own debts.
4. The going concern concept: Business entities are established
with the basic assumption that they will continue to exist
indefinitely, at least as long as the owner can reasonably expect future
earnings that will yield profits. This is the reason why assets are
considered to have future economic benefits. Without this, we would not
be able to anticipate that the asset would yield any future benefit, since
we would be assuming that the business entity might not be in operation
next year.
5. The stable dollar concept:
Money is the unit of measure employed in recording financial
transactions. Knowing the money value assigned to financial
transactions enables the users of financial statements to estimate the
profitability or solvency of a business enterprise.
As the value of the dollar changes over time, accountants cannot build
useful statements with unstable units of measurements. For this
reason, they prepare financial statements on the basis of the stable
dollar concept: the value of a dollar does not change over time. They
consider the dollar of a past year to be equal in value to a current dollar.
The accounting dollar is thus assumed to be stable.
NO REFLEJAN LA INFLACIN EN LOS ESTADOS FINANCIEROS.

THE PRINCIPAL FINANCIAL STATEMENTS

The main objective of general financial accounting is to describe the financial
conditions and operations of a business entity by preparing and publishing
financial statements.
There are two systems to prepare financial statements.
Nowadays, all business entities are compelled to use the ACCRUAL BASIS OF
ACCOUNTING (mtodo de lo devengado). This refers to the fact that revenue is
considered to be earned when services are performed, not when payment is
received, and that expenses are considered to be incurred when services are
received, not when cash is paid. This happens because accrued means that
someone has the right to receive payment, but it doesnt means that it will be
effectively received. Due to the fact that a company doesnt know whether it will
receive payment or not, it has to record everything. For example, two entries must
be recorded on the accounting book in the case that translation service is to be
provided. On one entry, there will be two accounts: account receivable and
translation fees. On the second entry, there will be other two entries: cash and
account receivable.
The principal financial statements are:
INCOME STATEMENT = STATEMENT OF INCOME (US)
PROFIT & LOSS ACCOUNT = PROFIT & LOSS STATEMENT (UK)
ESTADO DE RESULTADOS (ARG)
This statement reports the profitability of a business entity by comparing the
revenue earned during a specified period with the expenses incurred during
that period.
- When a business has more revenue than expenses, the difference is its
profit or net income (ingreso bruto).
- When expenses exceed revenue, the difference is called net loss and
the business has been unprofitable.
Revenue: The amount charged for goods sold or services rendered is called
revenue and represents the inflow of economic resources to the business
entity. [Lo que cobro por los servicios que ofrezco]
Examples: fees earned for professional services performed; commissions
earned; rental fees
Expenses: represent the economic resources consumed in providing products
or services to customers.

Expenses include goods sold or services rendered to generate revenue; the

cost of the goods or services the company buys to operate the business.
Examples: salaries; rent; supplies; utilities; cleaning services; repairs.
REVENUE EXPENSES = NET INCOME/NET
LOSS BOTTOM LINE
The heading: the heading consists of 3 lines

The name of the company

The type of financial statement
The period of time covered by the financial statement: revenue and
expenses are time concepts. This means that revenue is earned and
expenses are incurred over a period of time. Users must know what
period of time a statement covers in order to be able to interpret the
financial data reported and to compare them with previous financial
statements or financial statements of other firms.

STATEMENT OF OWNERS EQUITY (si es una sociedad sin capital

dividido en acciones)
En cambio, si est dividido en acciones:
STATEMENT OF STOCKHOLDERS EQUITY (US)
STATEMENT OF SHAREHOLDERS EQUITY (UK)
ESTADO DE EVOLUCIN DEL PATRIMONIO (ARG)

It shows how the owners investment has changed from the start of a
period to the end of a period. It serves as a link between the income statement
and the balance sheet, because the net income from the income statement is
recorded on the statement of owners equity and the ending balance of the
owners equity is shown on the balance sheet.
The Heading: it also has three parts:

The name of the company

The name of the statement
The period of time covered. This statement too covers a period of time.

INITIAL CAPITAL/investment x/x/x

add: NET INCOME
total:
less: WITHDRAWALS
CAPITAL X/X/X

BALANCE SHEET = STATEMENT OF FINANCIAL POSITION (more in

conn. w/ the US)

BALANCE GENERAL (ARG)

This financial statement is designed to show a business entitys financial
position- what it owns and what it owes- on a particular date. Unlike the
income statement and the statement of owners equity, which cover a period of
time, the balance sheet is a listing of assets, liabilities and owners equity
at a specific point in time [fecha de cierre de ejercicio].
The balance sheet consists of two sides:
- the left side: represents what the firm owns, its assets.
- the right side: represents what the firm owes, its liabilities and the amount
of the owners investment in the business, the owners equity, which is the
amount that the business owes to the owner.
Balance sheet equation
The total of the assets on the left side must equal or balance with the sum of
the liabilities and the owners equity on the right side. This formula is known as
the BALANCE SHEET EQUATION:
ASSETS =LIABILITIES +
OWNERS EQUITY
Assets: the assets of an economic entity are the economic resources- the
things of measurable value- that are owned by the entity and are expected to
provide future benefits (lo que necesito para producir). To be included on the
balance sheet as an asset, an economic resource must, by definition, be
measurable, if it is not measurable, it cannot be an asset. Assets may be
physical or nonphysical in nature:
-

Physical assets: include cash, merchandise, supplies, equipment, trucks,

machines, buildings and land.
Nonphysical assets: legal claims (such as amounts due from customers:
accounts receivable), and legal rights, such as patents or copyrights.

Examples of assets: cash; office equipment; office supplies; accounts

receivable
Liabilities: the liabilities of an economic entity are its debts. The debts may
be represented as:
-

formal claims: is a written contract, such as a written promise to repay a

borrowed sum of money plus interest at a specified future date; this is
called a note payable.
informal claims: such as an amount due to a creditor for goods and
services acquired but not yet paid for; this is called an account
payable.

Examples of liabilities: accounts payable

Owners equity: the difference between the assets and liabilities represents
the financial interest (share) of the owner in the business.
Example: capital
The Heading:

The name of the company

The type of financial statement
The date of the balance sheet (specific point in time)

STATEMENT OF CASH FLOWS

ESTADO DE FLUJO DE EFECTIVO = ESTADO DE FLUJO DE CAJA

This statement provides information about cash receipts and cash

payments in connection with the operating, investing, and financing activities
of a business.
The Heading:
The name of the company
The name of the statement
The period of time covered. This statement too covers a period of time.
THE BASIC ACCOUNTING MODEL
The goal of the accounting activity for a business entity is to prepare financial
statements to describe the entity.
Before financial statements can be prepared, the financial transactions of the
business entity must be recorded, classified and summarized.
This process of analysis relies on a simple relationship called the basic
accounting model which is expressed by the balance sheet equation
(assets =liabilities + owners equity). This equality is always true, because the
left side of the equation is simply another view of the right side. Assets
represent resources owned by the business entity and liabilities and
owners equity represent the claims of those who supplied the assets.
Financial transactions are events in which goods and services are
exchanged between economic entities and each of them affects the balance
sheet equation. Consider, for example the acquisition of an asset. Assets can
be acquired in three different ways, and each of these transactions has two
parts:
1. By paying cash: buying an office desk for cash would be an example. A

2. By promising to pay the amount due at some future date, thus

incurring a liability (buying ON account, buying ON credit, FOR
credit). When we buy in this way, we record the amount we owe the
creditor under the account payable. An account payable originates
whenever a person buys on credit, no matter whether it is in cash or
not.
Since every transaction has two parts, the term double entry accounting
(Sistema de Partida Doble) is used to refer to the recording of financial
transactions by balancing two elements within the basic accounting model.
Every company uses a set of accounts which are defined when the company is
created and will be used later on. This is referred to as Chart of Accounts
(Plan de cuentas) and it is very important since the company cannot use
other accounts but the ones included in the chart. Moreover, a good chart of
accounts is essential to reflect properly all the transactions so that accounting
information proves useful to its users.
When a specific asset, liability, or owner's equity item is created by a financial
transaction, it is listed on the financial transaction worksheet under the name
accounts.
Even if the business does not receive cash, it can earn revenue if it performs
services and is entitled to payment for them. This amount is recorded under
the accounts receivable. An account receivable represents that a person has
the right to be paid/collect. The person may be paid but not in full or he may be
paid all the amount in the future.
A withdrawal of cash or other assets for personal use is the means by which
owners of business entities receive a distribution of the profits. A cash
withdrawal transaction results in a reduction of both Cash and Capital.
BOOKS
The accounting information must be registered on accounting books. Each
transaction carried out by a business entity is booked/recorded as entries
(asiento), which are recordings of transactions, in the accounting books
(Libros Contables: where accounting records are registered) of the company.
Entries have to be recorded in chronological order in the columns of debit
(debe) and credit (haber).
There are different types of books that a company uses to record accounting
information:

GENERAL JOURNAL: Libro diario. Everyday transactions backed by different

documents are recorded on this book. According to the objectivity principle
assets must be recorded at cost (its historical cost), this means at the price
that the buyer paid for them.
GENERAL LEDGER: Libro mayor. In this book the information in the journal is
summarized. The information recorded on the journal is posted from it TO the
ledger. The balances (saldos) in the general ledger are determined and then
transferred to the:
TRIAL BALANCE: Balance de sumas y saldos. In order to check that the debit
and credit columns have equal results a trial balance must be prepared. If there
are any mistakes, adjustment entries must be made/recorded. After the
adjusted trial balance has been prepared, then financial statements
(estados contables) can be prepared.

ACCOUNTS
Different types of accounts are used by business entities to record different
types of transactions:
1. ASSET ACCOUNTS (cuentas del activo): what an entity owns and
uses to produce goods and services bienes que tengo o que necesito
para producer.
a. Increases are recorded on the DEBIT side las cuentas del
active crecen cuando se utilizan del lado del debit. O sea tengo
ms dinero.
b. Decreases are recorded on the CREDIT side las cuentas del
active disminuyen cuando se utilizan del lado del credit.
For example: Cash, Accounts Receivable/Receivables.
Accounts receivable: accounts that represent a right a
person/business has to be paid. The person doesnt know whether he is
going to be paid effectively.
-

El activo est compuesto por:

Bienes con los que se produce un servicio/negocio
Derechos que tenes de cobrar

2. LIABILITY ACCOUNTS (cuentas del pasivo): Lo que debo a

terceros.
a. Increases are recorded on the CREDITside las cuentas del
pasivo aumentan del lado del credit
b. Decreases are recorded on the DEBIT side las cuentas del
pasivo disminuyen del lado del debit.
For example: Accounts Payable/Payables.

3. OWNERS EQUITY ACCOUNT (cuentas del patrimonio neto): lo

que invirtieron los dueos y retiros que hubiesen habido.
For example: Capital; withdrawal, revenue.
4. REVENUE ACCOUNTS: (Cuentas de Ingresos) lo que se genera con
las ventas que se hacen. For example: Sales, services rendered.
5. EXPENSE ACCOUNTS: (Cuentas de Gastos o egresos) por cosas
que necesito para producir. For example: Utilities, to make chairs:
woods, nails, etc. NO TAXES.
NORMAL BALANCE
All the accounts have a normal balance, which is the positive balance of an
account, which means that the sum of the increases exceeds the sum of the
decreases.
Es el saldo que suelen tener siempre las cuentas por el tipo de cuenta que son.
The normal balance of each account is explained here:
1. Assets accounts: si los increases se aumentan del lado del debit y los
decreases tdel lado del credit. The normal balance is a DEBIT
BALANCE. O sea, se anota el balance del lado del debit, porque es
donde se incrementa.
2. Liabilities accounts: the normal balance is a CREDIT BALANCE.
3. Owners equity accounts: the normal balance is a CREDIT
BALANCE porque:
a. Expenses hacen que el owners equity DISMINUYA.
b. Revenues hacen que el owners equity AUMENTE
Entonces, si el revenue hace amentarlo, it has a normal CREDIT
BALANCE. Cundo aumente, o hace del lado del credit.
4. Expenses accounts: the normal balance is a DEBIT BALANCE
5. Revenue accounts: the normal balance is a CREDIT BALANCE

1.

2.

3.

4.

THE ACCOUNTING PROCESS

First of all, any firm that is created must have an initial capital, which
is composed of the contributions made by its members. The accounting
process always starts with a transaction.
A business entity enters into a written or oral transaction with a
second party. That transaction has to be recorded as an entry on the
accounting book under an account.
A business document is prepared to support the transaction. They are
the written proof of the transaction and they may be sales invoices or
purchase invoices.
The transaction is recorded in the GENERAL JOURNAL. Daily
transactions are recorded in chronological order. chart of accounts

5. At regular intervals (such as monthly), entries from the general journal

are posted to the accounts in the GENERAL LEDGER. Summarized
information is posted to this ledger. Each account is summarized and the
balances (SALDO DE UNA CUENTA), either credit or debit balance,
are posted to the general ledger.
6. The balances in the general ledger accounts are determined and a TIAL
BALANCE (balance de sumas y saldos) is prepared. If any adjustment
must be made, an ADJUSTED TRIAL BALANCE is prepared after
adjustment entries have been prepared.
7. All the financial information is used in order to prepare the financial
statements, such as the INCOME STATEMENT, the STATEMENT OF
OWNERS EQUITY and the BALANCE SHEET.
8. After this, auditing.
TYPES OF ASSETS
1. Current assets are the assets that will be used up or turned into cash
within a year. They include: cash, cash equivalents, short-term
investments, receivables, debtors.
2. Fixed or capital assets (Br.) = Property, plant and equipment
(Am.) are required for making and selling the firm's products and,
therefore, cannot be sold or turned into cash. e.g.: land, buildings,
furniture, equipment, machinery, computers, etc. They are investments
that will be used by the business for a long time.
3. Intangible assets have value but not substance, therefore, they are
difficult to appraise. They represent legal rights that provide their owners
with future economic benefits. e.g.: patents, copyrights, goodwill, etc.
They have limited lives and do wear out. That is called
AMORTIZATION(Sp. Amortizacion).
Intangible asstes include brand names (legally protected names for a
companys products); patents (exclusive rights to produce a particular
new product for a fixed period); trademarks (names or symbols that are
put on products and cannot be used by other companies).
network of contacts, loyal customers, reputation, trained staff or human
capital, and skilled management can also be considered as intangible
assets.
Because it is difficult to give an accurate value for any of these things,
companies normally only record tangible assets. For this reason, a

GOING CONCERN (idea de que las empresas se crean para que tengan
perpetual existence) should be worth more on the stock exchange than
simply its net worth or net assets: assets minus liabilities.
If a company buys another one at above its net worth because of its
intangible assets, the difference in price is recorded under assets in the
balance sheet as GOODWILL (valor de la empresa. Es un active).
4. Tangible assets have substance, physical existence since we can see
them and touch them. e.g.: property, plant and equipment, vehicles,
computers. These assets have limited life and do wear out, they undergo
a DEPRECIATION. (Sp. Depreciacion). Tangible assets are recorded at
their historical cost, less accumulated depreciation charges. This gives
their net book value.
5. Liquid Assets are anything that can quickly be turned into cash. e.g.:
currrency, money held in bank accounts, checks, etc.
6. Illiquid Assets are assets that are not easily and quickly converted into
cash. e.g.: factories, land, etc.
7. Wasting assets are those which are gradually exhausted in production
and cannot be replaced. The DEPLETION of them takes place when they
are used up. No se gastan, sino que quedan sin nada.
8. Net current assets / working capital: are the excess of current
assets over current liabilities.
SUMMARY OF SOME PHOTOCOPIES
Assets, liabilities and capital
Companies publish annual balance sheets: statements for shareholders and
creditors. The bs is a document which has two halves. The total of both are
always the same, so they balance. One half shows a business's assets, which
are things owned by the company, such as factories and machine, that will
bring future economic benefits. The other half shows the company's liabilities
and its owner's capital / shareholders' equity.
Liabilities are obligations to pay other organizations or people: money that
the company owes, or will owe at a future date. e.g.: loans, taxes, future
pension payments, bills from suppliers.
Since assets are shown as debit (as the cash or capital account was debited to
purchase them), and the total must correspond with the total sum of the

credits, that is, the liabilities and capital, assets equal liabilities plus
capital. Companies now use a vertical format, with assets at the top, and
liabilities and capital below.
Shareholders' equity (owner's capital)
Shareholders' equity consist of all the money belonging to shareholders. Part
of this is share capital (the money the company raised by selling its shares).
Another part is retained earnings (profits from previous years that have not
been distributed to shareholders as dividends).
SHAREHOLDERS' EQUITY = THE COMPANY NET ASSETS
OR
SHAREHOLDERS' EQUITY = ASSETS LIABILITIES
The cash flow account / profit and loss account (not the balance sheet)
shows how much money a company has spent or received during a year.
Liabilities
Are amounts of money that a company owes, and generally divided into:
-

Current liabilities: obligations that require the use of current assets for
their payment. Thus, they represent liabilities that will be paid within a
year of the date of the balance sheet. E.g. notes payable, accounts
payable, salaries payable, deferred taxes, creditors.

Long-term liabilities = non-current liabilities: they represent the

obligations that will be paid more than one year after of the date on the
balance sheet. E.g.: mortgages payable, bonds payable.

Equivalences
Certified Public Accountant (CPA) US
Chartered Public Accountant (CPA) UK
Contador pblico Argentina
Accounting book: libro contable
Accounting record: registro contable
Bookkeeper: tenedor de libros
Entry: asiento (recording of a transaction under the accounting book)
Chart of accounts: plan de cuentas (it includes the name and number
of all the accounts that are going to be used in the financial statements)
Double entry accounting: sistema de doble partida

 Debit: deber
Credit: haber
Account: cuenta
ASSETS = ACTIVO .
LIABILITIES = PASIVO .
Accounts receivable/receivables: cuentas a cobrar
Accounts payable/payables: cuentas a pagar
Liability accounts: cuentas del pasivo
Asset accounts: cuentas del active
Owners equity accounts/shareholders/stockholders accounts:
cuentas del patrimonio neto
Revenue accounts: cuentas de ingresos
Expense accounts: cuentas de egreso/gasto.
YEAR: ao contable/de ejercicio
To book/record an entry
General ledger: libro mayor
General journal: libro diario
Financial statements: estados constables
Auditing: auditora
Audit: auditor o auditora
Auditors oinion: dictamen del auditor lo que resuelve
Audit report: informe del auditor lo que tiene el dictamen
Qualified report: observacin del auditor en el informe.
Generally accepted accounting principles (GAAP): principios de
contabilidad generalmente aceptados (PCGA)
1 purchase; 2 purchase; 3 purchase.
Transaction
Parent company: central
Small companies: sucursales
Consolidated financial statement: all the financial statements of all
the small companies are merged. At the same time, there is one financial
statement for the parent company.
International Accounting Standard Committee (IASC) or the
International Accounting Standard Board (IASB).
International Accounting Norms (IAN): Normas Internacionales
de Contabilidad (NIC).
International Financial Reporting Standards (IASB): Normas
Internacionales de Informacin Financiera (NIIF)
Trial balance: balance de sumas y saldos
Accrual basis of accounting: mtodo de lo devengado
Cash basis of accounting: mtodo de lo percibido
Deudas incobrables: bad debts.
Bottom line: in business, bottom line is another name used for net
income. It appears on the last line of the income statement, and is
equivalent to an entitys income minus expenses for an accounting

period. It is computed as the residual of all revenues and gains over all
expenses and losses for the period.
Net income: ingreso bruto
Loss income: prdida
Book value (precio de libro) # market value (precio de mercado). Una
vez que se le saca la depreciation, queda el book value.
Make an adjustment/record an adjustment entry. Then financial
statements are prepared.