Corporate accounting: what it is and examples

The management of a company’s assets and liabilities is one of the major challenges that companies have to face. To stay in the ecosystem, it is not enough to raise new funds and investments, it is also necessary to have a deep understanding of the company’s financial situation. In this context, corporate accounting will be the key to managing resources and developing new strategies.

What is corporate accounting?

It is the process used by companies to keep their finances up to date. This branch of accounting enables companies to record all their economic transactions and thus obtain a reliable picture of their operational and financial status, which helps them to make better decisions. It also provides information to investors, employees and government agencies.

Thanks to corporate accounting, companies can obtain a historical record of their movements, enabling them to gain in-depth knowledge of their commercial development, identify risks and opportunities, manage resources and better define their business strategies. In order to keep proper accounting records for a company, the following factors need be to be considered:

• Assets. All assets, securities, rights and resources owned by a company.
• Liabilities. Debts and obligations incurred by the company to carry out its activity.
• Net worth. Represents the company’s own financing and includes the capital contributed by the partners and the reserves and assets in the previous year.
• Cash flow. Reflects a company’s cash inflows and outflows during a given period.
• Income. Amounts received by companies in exchange for their products or services.
• Expenses. Costs incurred in carrying out the activity. They may be fixed (independent of production activity) or variable (they are directly related to the production of the product).
• Profit. The difference between fixed and variable income and expenses.
• Accounts receivable. Invoices or payments that the company has not yet received from a customer.
• Accounts payable. Amounts owed by the company to suppliers which have not yet been paid.

Corporate accounting principles

When it comes to corporate accounting, there are a number of principles that companies must respect so that their accounts accurately reflect their financial, economic and equity reality. These criteria are included in the General Chart of Accounts and are intended to standardise the way in which companies submit their accounts.

• Going concern principle. The application of the accounting principles and criteria, in the event that the company continues in operation, will not have the purpose of determining the cost of the company in the event of sale or liquidation. In the event of any of these transactions, the company will apply the valuation standards that best reflect its financial reality.
• Accrual principle. The effects of transactions or economic events, i.e., expenses and income, are recorded when they occur and are recognised in the corresponding period.
• Uniformity principle. Once an accounting policy is adopted, it should be maintained over time and applied consistently to all related transactions, provided that the assumptions that led to its selection are not changed.
• Principle of prudence. Estimates and valuations made under conditions of uncertainty must be prudent, while giving a true and fair view of the financial reality of the company.
• Principle of non-compensation. Unless a regulation expressly states otherwise, asset and liability items or expenses and income items may not be offset against each other. The items in the annual accounts are valued separately.
• Principle of materiality. The accounting criteria and principles may not be strictly applied when the significance of the valuation is insignificant and, consequently, does not alter the company’s image.

Mandatory accounting documents

In addition to the accounting principles, there are also certain documents that must be completed on a mandatory basis. These enable companies to keep track of their operations, facilitate the preparation of balance sheets and financial reports and, in essence, analyse their financial situation and make decisions.

According to the Tax Agency, there are two mandatory documents for companies established in Spain: the ‘Inventory and Annual Accounts Book’ and the ‘Journal’. These are regulated by Article 27 of the Commercial Code, which stipulates that they must be filed with the Trade Registry of the place where the company’s registered office is located.

Inventory and Annual Accounts Book

It collects information on the assets, rights and obligations of companies at a given time. It contains the following information:

• Detailed balance sheet of the company’s situation. Information on the beginning and end of the financial year to which the document refers. It shows the company’s financial position, i.e., assets, liabilities and net worth.
• Trial balance. Relationship between the company’s assets and liabilities. This information must be transcribed at least quarterly.

• Year-end inventory. It includes the assets and rights that make up the company’s net worth at the end of the accounting period.
• Annual accounts. They give a true and fair view of the company’s net worth, financial position and profit or loss. In accordance with Article 34 of the Commercial Code, they must be drawn up at the end of the financial year and include the following documents:

1. Balance. It includes, separately, assets, liabilities and net worth.
2. Profit and loss account. It shows the profit or loss for the year, separating attributable income and expenses and distinguishing between operating results and non-operating results.
3. Statement of changes in net worth. It consists of two parts: the first part only shows the income and expenses generated by the company during the year, distinguishing between those included in the profit and loss account and those appearing in net worth; the second part shows the movements that have occurred in net worth.
4. Cash flow statement. It shows the collections and payments made by the company.
5. Annual report. It contains additional information about the company’s profit or loss and financial position.

Journal

It contains all the operations related to the company’s activity. It is made up of a series of accounting entries (notes to record the economic operations of a company) that must be supported by original documents, such as purchase orders or receipts. As a rule, the transactions in this document should be recorded on a daily basis, although it is also possible to record the totals of the transactions quarterly, provided that their details appear in other records.

Keeping track of a company’s income and expenses is essential to grow within the ecosystem. Corporate accounting is crucial for any entrepreneur who wants to know how their company is developing and make the right decisions.