Accounting principles are the essential standards on which business accounting must be based. In this article we will see the 6 accounting principles that govern in Spain according to the annual accounts according to the General Accounting Plan in force in Spain.
Going concern principle
The General Accounting Plan explains the principle of a going concern as follows:
"It will be considered, unless proven otherwise, that the management of the company will continue in the foreseeable future, so the application of accounting principles and criteria does not have the purpose of determining the value of equity for the purposes of its global transmission or partial, nor the resulting amount in case of liquidation. "
This principle is important for investors, since the liquidation value of a company in most cases will be different from the book value, so different modifications will have to be made to obtain the real value, either up or down. downward.
Transactions or economic events will be part of the accounting at the time they occur, not at the time of payment or collection.
This principle is important, since although a company may have a great accounting benefit, it may not be very realistic if it does not collect. In fact, the number of companies that, despite having accounting benefits, end up in bankruptcy because of clients who do not pay their debts is not insignificant.
Principle of uniformity
Accounting legislation allows different criteria to be used to account for transactions or economic events. The principle of uniformity requires that the selected criteria cannot be modified without further ado, but rather that an analysis of the impact of the change in accounting criteria on the annual report account is required.
Principle of prudence
The principle of prudence requires that transactions or economic events must be accounted for prudently in the event of uncertainty. This implies that future benefits cannot be recorded until the business is definitively perfected.
This principle also implies that risks must be accounted for in the annual accounts, either in the report, or that future losses be provisioned if risks that may cause future losses are identified.
Principle of no compensation
Unless a rule expressly provides otherwise, the asset and liability items or expenses and income items may not be offset. In addition, the elements of the annual accounts will be valued separately. This makes accounting reflect reality more extensively than if the principle of no compensation existed.
Principle of relative importance
The principle of relative importance talks about the intensity with which these principles should be applied in different cases. The General Accounting Plan determines that:
"The strict non-application of some of the accounting principles and criteria will be admitted when the relative importance in quantitative or qualitative terms of the variation that such fact produces is scarcely significant and, consequently, does not alter the expression of the true image."
In other words, the application of these principles is softened in some cases as long as they do not alter the true image that a company's accounting should give.
What happens in the event of a conflict between accounting principles?
As a closing rule, the General Accounting Plan offers us a solution for cases of conflict between different accounting principles. In this case, the accounting principle that best leads to the annual accounts expressing a true image of the assets, financial situation and results of the company must prevail.