Chapter 5
ANALYSIS OF THE COUNTABLE PRINCIPLES
The Digital Revolution, an excellent opportunity for those with sufficient skills to take advantage of it, confronts us with a very complex change, forcing traditional companies to reinvent themselves to adapt to the new or disappear. Disruptive phenomena can occur anywhere in the world and it is not known when, which forces organizations to prepare for these eventualities and have the capacity to adapt to changes and, above all, to the speed of occurrence.
1. ECONOMIC BODY
This principle defines the accounting unit and emphasizes the distinction between the firm and the owners. For that reason, it is needed to register the operations of the company and its owners, as equal to others. The body must be defined in a way in which it can be distinguished from others and able to have exclusive accounting. For practical cases, a certificate of constitution and management is required. Due to this principle, the presentation of a consolidated balance becomes recommendable, especially for economic groups.
2. CONTINUITY
It is assumed that a company has undefined life, except for an express indication on the contrary. Normally, permanence is expected and not its liquidation.
According to this principle, the value of liquidation does not constitute a criterion for valuation of the assets, with the exception of a special case in which it is indicated that the economic entity will not continue working normally due to capital deficiency, accumulated losses, strikes, and governmental restrictions, etc.
The generation of monetary funds gains importance, according to which the value of a company or its assets is calculated by its capacity to generate cash flow. As a consequence of this, it is accepted that the merchandise in the process may have some value (depending on a suitable criterion of valuation) even though in a specific stage of production its real value can be zero.
On the other hand, due to this philosophical base the accumulation of expenses that will appear in the future to maintain the company in an increasing process. The projection of cash flow constituted at a fundamental accounting statement, replaces the balance ship as based on the real estimation of the value of an organization because, through it, the risk of falling into technical insolvency can be calculated. One demands explanatory notes in case of negative tendencies, financial difficulties, and other internal or external causes.
3. OBJECTIVITY
The accounting transactions and the financial statements must have plenty of endorsement in reality supported by facts and documents. For that, by any possible means, verifiable proof must exist objectively. It is possible to be replaced by the criterion of the accountant and the director's body. According to Grey, the reliability of the accounting data is obtained by means of suitable measures of internal control.
With a little analysis, it can be concluded that the accounting measurements have variable degrees of objectivity that depend on the ones that are being moderate and the capacity of those who are doing. Later on, when we analyze the accounting caution, we can see how these principles, in a certain way, are somehow contradictory therefore a good criterion for those users of financial statements is demanded.
4. CONSISTENCY OR CONTINUITY
The accounting practices must be applied constantly through time. The application of alternative practices that can give enormously divergent results is avoided. As in accounting, we have several procedures for the same aim (valuation of inventories, calculation of depreciation, recognition of rent, etc.), the selection of a method that better adapts to each particular case, and it is application year after year is required.
Of course, respect for consistency does not mean that the methods of accounting, once adopted, can never be changed. If sometimes a change is considered advisable more towards another suitable procedure, it is possible, as long as it is complemented with an explanatory note to the financial statements.
5. CAUTIOUSNESS
A profit must be recognized only at the moment of its accomplishment; the loss must be entered with the single expectation, in order to balance a little the not well-based optimism. Another way to interpret it consists of sub valuing the net profits and the accounting capital instead of overvaluing them in case of doubt. The principle, in a certain way, is oriented to protect the bankers, the investors, and the creditors.
Sometimes an exaggerated application can take away the reality of the information that the financial statements provide, this situation would cause the violation of the objectivity previously commented.
According to Moritz, the conservative is not more than a warning in order to act in a cautious way considering all the pertinent factors. In practice, the preserving doctrine has become the most used tool by the businessman to undervalue the profits and exaggerate the losses.
With the unrestricted acceptance of this principle, businessmen have found useful resources to reduce profit. The damaged field is the state treasurer because its accounting has been oriented fundamentally with a tributary criterion. Another damage, without a doubt, is the small shareholder who does not have access to the information.
With a batter analysis, the stock market is clearly explained as the best practice procedure to buy a company, used among other indicators the Q of Tobin (the value of a share in the market/the intrinsic value).
6. UNIT OF MEASUREMENT
7. PERIOD
The economic body must prepare and spread periodic financial statements; the cuts, previously defined in consideration to the cycle of the operations. It must be made at a minimum, once a year.
8. PRACTICAL CHARACTERISTICS OF EACH ACTIVITY
it forces us to recognize the economic facts made solely; in other words, it can be verified what have or will have a benefit or a quantifiable commitment.
10. ASSOCIATION
It indicates that the income of an accounting period must be associated, with the costs and expenses incurred to generate them and to register those incomes simultaneously in the accounts of results.
11. TOTAL REVELATION
In a brief way, the current information due to the financial situation is needed, the experienced changes, and their capacity to generate cash flow in the future. This indicates that in addition to the basic financial statements, the information of managers is an integral part of the information as well as the fiscal auditors and the notes of the sheets.
12. ESSENCE ON FORM
The economic facts must not merely be informed according to their essence and legal form.
13. VALUATION OR MEASUREMENT
All the headings of the financial statements must be expressed in monetary terms with subjection to technical norms (updated historical value, present value or of replacement, the value of accomplishment or market, discounted present value).
14. MAINTENANCE OF THE EQUITY
It is understood that first of all, the economic body must maintain or recover its equity properly updated to reflect the effect of inflation.
Note: in Colombia, the adoption of International Financial Reporting Standards (IFRS) in 2017 shows the evolution that our country is having towards an accelerated process of internationalization and good corporate governance practices.
IA opinion: the opinion expressed by José Saúl Velásquez Restrepo on accounting principles is informative and provides an overview of the importance of accounting principles in accounting and financial reporting.
Overall, the article provides a comprehensive overview of the importance of accounting principles and their application in business accounting. Accounting principles play a critical role in accurate financial reporting and informed decision making by investors, regulators, and other users of financial information.