Clase digital 6. Contabilidad básica (basic accounting)

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Contabilidad básica (basic accounting)

1. Fundamentación del tema

This topic is part of the Business Communication Learning Unit (UDA, for its acronym in Spanish), which belongs to the sixth semester of the Licenciatura en Contador Público (public accountant). The importance of this topic lies in providing financial information to its users for decision making, as well as having the elements to recognize and predict the behavior of an economic entity, which is the very purpose of accounting. This purpose has an international application, i.e., it is necessary to generate financial information in all parts of the world.

2. Objetivo didáctico

Recognize relevant terms and issues of basic accounting in English to establish a frame of reference for the future accountant to be able to perform any function in this area.

3. Contenido didáctico

Introducción

Welcome back, dear student! This didactic resource has been prepared specially for you. In it, we will show you very interesting topics about accounting. The purpose here is for you to understand these topics in a foreign language and to create a framework that will provide you with the tools when performing the profession.

In order to do this, we will discuss the concept of accounting, the financial regulations in an international framework, the needs of users, the qualitative characteristics of financial information and a little about financial statements and their elements. 

Let’s start with this exciting topic!

Desarrollo del tema

1. Accounting Concept

The first thing we need to talk about when dealing with accounting is its definition. We will use the definition by the Mexican Financial Reporting Standards Board (CINIF for its Spanish acronym), in charge of providing accounting standards in Mexico and linking them with international regulations. The CINIF defines accounting in its financial reporting standard (FRS), NIF A-1, as 

“a technique for the registration of operations that affect financially an entity and that produces systematic and structured financial information. Operations that economically affect an entity include transactions, internal transformations, and other events”

(CINIF, 2020).

It is mentioned that accounting is a recording technique, this leads to the management of data to generate financial information in a systematic and structured way. To do this, as a public accountant, we use regulatory standards or particular pronouncements, as well as professional judgment and data systems, whether electronic, manual, magnetic, among others, to generate financial information.

2. Financial information

Accounting, as we understand it, has the objective of providing financial information in a systematic and structured way. Accordingly, it is important to specify what we refer to as financial information derived from accounting, its use and importance for the users of the information. For this purpose, we will also address the FRS “NIF A-1” published by the CINIF:

  • The financial information that emanates from accounting is quantitative information, expressed in monetary and descriptive units, showing financial position and performance of an entity, and whose essential objective is to be useful to the general user in making their economic decisions. Its fundamental manifestation is the financial statements. It focuses essentially in provide information that allows evaluating the performance of the entity, as well as in providing elements of judgment to estimate the future behavior of the economic entity.

(CINIF, 2020).

3. The needs of users

We have already remarked what accounting refers to, as well as its objective, the use and the importance of financial information for users. Now we must determine who the users of the information are, i.e. all those individuals who make use of financial information for different purposes. The FRS “NIF A-3”, issued by the CINIF, refers to these users of information as:

  1. Owner or investor: “It is any person who participates contractually or not contractually in the benefits and economic risks of the net assets of an entity, including partners, associates and members or participants of a mutual society (profit-making entities)» (CINIF, 2020). Examples of them are those commonly referred to as partners or shareholders.
  2. Sponsors – «Includes employers, donors, associates and members, who provide resources that are not directly compensated (non-profit entities)» (CINIF, 2020). An example in everyday life are the sponsors of sports teams.
  3. Internal or external corporate supervision and oversight bodies – «They are responsible for supervising and evaluating the management of the entities» (CINIF, 2020). An example of them in a company is the vigilance team that is reflected in the founding act.
  4. Administrators – «They are responsible for complying with the mandate of the governing bodies (including sponsors or shareholders) and directing the operational activities» (CINIF, 2020). For example the administrator or the board of directors of a commercial society.
  5. Suppliers – «They are those who provide goods and services for the operation of the entity» (CINIF, 2020).
  6. Creditors – «Includes financial institutions and other types of creditors» (CINIF, 2020). An example of these are banking institutions granting financing.
  7. Employee and third party who provide similar services – «They are those who work for the entity» (CINIF, 2020).
  8. Client – «It is a party that has contracted with an entity to obtain goods or services (or a combination of goods and services) that come from the main activities of this entity in exchange for a remuneration» (CINIF, 2020). This means those people who acquire the products or services that we offer in exchange for remuneration.
  9. Government units – «They are responsible for establishing economic, monetary and fiscal policies, as well as participating in economic activity by obtaining financing and allocating government budget» (CINIF, 2020).
  10. Regulatory bodies – “They are in charge of regulating, promoting and monitoring the financial markets” (CINIF, 2020). An example would be the National Banking and Securities Commission, as well as other national and international regulatory bodies.
  11. Other users – «Includes other interested parties not included in the previous sections» (CINIF, 2020). Examples could be consultants, brokers, public investor market, or potential investors.

As we can see, there are many users of the information generated by the accountants, as well as very different purposes of its use. It is not enough to just generate information, accountants must be sure that the financial information they provide meets certain qualitative characteristics. This way the information will be useful for the user, which will be discussed in the next subtopic.

4. Qualitative characteristics of financial information

As mentioned above, in order for financial information to be useful to users, we must ensure that such information meets the following qualitative characteristics, which are not mutually exclusive. To make it more understandable, the CINIF has classified in its FRS “NIF A-4” these characteristics into primary and secondary. Secondary characteristics are associated with the primary characteristics, i.e. those characteristics that should not be omitted from financial reporting. They are:

  • Reliability. Financial information should be consistent with its content, regarding the reality of transactions, internal transformations, and other events that affect the economic entity. 
  • Relevance. Financial information must influence the decision-making of users.
  • Understandability. Financial information should help the user to better understand the public entity and its financial situation.
  • Comparability. Financial information should enable the user to identify and analyze other financial information over time.

In this FRS, secondary characteristics are associated with the first two primary characteristics: reliability and relevance. The secondary characteristics oriented to reliability are:

  • Veracity. Transactions, internal transformations, and other events that happened should be reflected.
  • Representativeness. There must be consistency between financial information and transactions, internal transformations, and other events of the entity.
  • Objectivity. There should be no room for bias or prejudice in financial reporting, it should be presented as objective as possible.
  • Verifiability. Financial information can be checked and validated. 
  • Enough information. Financial information must be sufficient for the user to take it as a reference for decision-making.

The secondary characteristics oriented to relevance are:

  • Predictability and confirmability. Financial information must have sufficient elements for the user to have a reference when making predictions and projections.
  • Relative importance. Financial information must show the most relevant aspects of the economic entity.

«In practice, it is necessary to find a balance between the aforementioned characteristics to adequately satisfy the needs of general users and, thereby, meet the objectives of financial information».

(CINIF, 2020).

It is possible that sometimes the financial information generated encounters some restrictions that make it difficult to obtain an optimal level of one or another quality. Among these restrictions are:

  • Timeliness: Financial information must be issued in a timely manner so that it is useful to the user for decision-making.
  • Relationship between cost and benefit: Since financial information implies costs, we must analyze this relationship.

This is just a brief explanation of the accounting framework in Mexico, but if you are interested in learning about frameworks in other countries, you should watch the following video that shows the framework for the preparation and presentation of financial statements used in other parts of the world:

After this, it is time to talk about the basic financial statements and their elements.

5. Financial statements and their elements

The information provided by accounting reflects the current financial situation of an economic entity. This information is presented in different ways, one of them is throughout financial statements. In this last subtopic, we will show you their 4 common points and some of their elements. Please, click the link below to see the presentation we have prepared for you.

Tema 6. Basic Accounting-Financial Statements.

We hope this topic was useful for you. See you next time!

Resumen e ideas relevantes

It is important that you keep in mind:

  • Accounting is a technique used to record transactions that economically affect an entity. It produces systematic and structured financial information.
  • Financial information (or financial reporting) is useful for the users of such information to make decisions..
  • Financial information must meet qualitative characteristics, both primary and secondary.
  • Financial information is usually reported through financial statements. The most common are: statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, and statement of cash flows.

Fuentes de consulta