Accounting principles

In this section we refer to Generally Accepted Accounting Principles (GAAP) so that you can find out what accounting is based on to give a true and fair view of the company’s activity.

What are Generally Accepted Accounting Principles (GAAP)?

GAAP is a set of rules and standards necessary for the proper accounting of a company’s assets and liabilities and other economic elements.

Where are they located?

The General Chart of Accounts (PGC) defines part of the principles applicable to Spanish companies. The other part of the PGCA is issued by academic institutions or derived from the best practice in each case.

Apart from the PGC, the Code of Commerce and other commercial legislation are official issuers of accounting principles.

What are the accounting principles?

The accounting principles are:

  • Accrual basis

Economic transactions or events are recorded in the accounts at the time they occur, not at the time of payment or collection.

This principle is important, because although a company may have a large accounting profit, it may not be very realistic if it does not ultimately get paid.

  • Principle of uniformity

Accounting legislation permits the use of different approaches to accounting for economic transactions or events. The principle of consistency requires that the selected criteria cannot simply be changed, but that an analysis of the impact of the change in accounting criteria is required in the annual report.

  • Principle of prudence

Compliance with the principle of prudence requires prudence in estimates and measurements to be made under conditions of uncertainty. Prudence does not mean that the valuation of assets and liabilities does not give a true and fair view which should be disclosed in the annual accounts. However, as stipulated in Article 38a of the French Commercial Code, only profits made up to the end of the financial year should be taken into account. On the other hand, all risks arising from the previous financial year(s) must be taken into account as soon as they become known, even if they only become known between the closing date of the annual accounts and the date on which they are drawn up.

  • Principle of non-offsetting

According to accounting rules, it is not permitted to offset asset and liability accounts, or expenses and income even if they share the same origin.

The no-netting principle is part of GAAP and prohibits the offsetting of accounts against each other.

Assets may not be offset against liabilities, or income against expenses; in fact, these items must be valued separately and independently.

  • Principle of materiality

The principle of materiality is an accounting rule which states that the application of some accounting principles may be omitted if the items arising from an economic activity, are not material.

The objective of this principle is that the financial statements (balance sheet, notes to the financial statements or income statement) reflect only material economic events.

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