ACCOUNTING

ACCOUNTING
ASSETS/EQUITY
ACCOUNTING STATEMENTS
FINANCIAL STATEMENTS
HISTORY OF ACCOUNTING
BALANCE SHEET
INCOME STATEMENT
ACCOUNTING
ACCOUNTS ACCOUNTING
PRINCIPLES ACCOUNTING
CONVENTIONS ASSETS
LIABILITIES
PROFIT
LOSS
EXPENSE
COST

INTRODUCTION

Accounting is a science that enables the monitoring, control, and analysis of the equity of entities in general, including public bodies and companies, through techniques created and developed by professionals with knowledge and experience in this field. According to the Michaelis Dictionary, Accounting is the science and art of recording, classifying, and summarizing, in a way that makes sense in monetary terms, transactions and events that are, at least in part, of a financial nature, and the interpretation of their results.

Accounting is not an end in itself, that is, it is a useful instrument to communicate to interested parties or users, in its own language, financial facts about an entity, such as a company, for example, to its administrators or managers, who are those interested in using or interpreting them to make decisions.

According to the Larousse Dictionary, the term Accounting (Contabilidade) originated from the term comptabilité in French. It is the science of commercial accounts, involving the bookkeeping of income and expense accounts in software, books, and specific documents. Accounting is the service related to these accounts; it is the set of accounts of a public body, a commercial, industrial, or service-providing establishment.

In the context of Accounting, an entity is any natural person or legal entity that possesses equity/assets. For example, companies in general, governments, non-governmental organizations, philanthropic entities, and even ordinary people can be considered an entity, provided they have equity to be evaluated.

MAIN CHARACTERISTICS

Accounting is an applied science whose main objective is the study of the equity of entities in general, including companies, governments, and even individuals, including the phenomena and variations in general that affect or may affect their equity, both in quantitative and qualitative aspects, recording the facts and acts of an economic-financial nature that affect it and studying their consequences on the equity.

Depending on the source consulted, the word Accounting derives from the Italian term contabilità and the French comptabilité, in reference to the use of accounting accounts. In practice, Accounting is the science that determines the increase and/or decrease of the equity of entities in a given period of time—that is, the change in their wealth, for more or for less—and measures its profit and/or loss for each period, generally year by year and/or every three months, depending on each case.

It is a branch of knowledge whose fundamentals and objectives revolve around obtaining quantitative and qualitative measures for decision-making by the entity's administrators or managers, through the application of mathematical tools and techniques to produce accounting or financial reports or statements that show an adequate interpretation of the economic, financial, physical, and equity reality of the entities.

Accounting is, therefore, the science of measuring, processing, and communicating economic-financial information about entities, for-profit or non-profit, depending on each case, whether they are governments, state-owned or public companies, mixed-capital companies, private companies, philanthropic entities in general, non-governmental organizations, and even individuals, depending on each case.

The main users of Accounting are public administrators, also known as public managers, among them city mayors, state governors, and the President of the Republic; private investors in general, also known as entrepreneurs; hired administrators or managers, also known as executives; creditors of entities in general, usually financial institutions and suppliers of inputs; and public servants responsible for the supervision and regulation of public and private entities, including inspectors, delegates, experts, prosecutors, investigators, and counselors of courts of auditors, for example.

Accounting is the science that performs the classification, recording, and analysis of all transactions of an entity, such as a public body or company, thereby allowing a constant evaluation of the economic-financial situation—that is, its equity and the profit or loss in a specific period, depending on each case. One of its main objectives is to provide information support so that managers of entities in general can make relevant decisions about the directions to be taken by the entities.

This analysis involves all aspects of the entity that can be expressed in numbers, such as assets (property), liabilities (debts), revenues and expenses or costs, depreciation and amortization, profits and losses, and the rights of investors.

According to official Brazilian doctrine, organized by the CFC - Federal Accounting Council, Accounting is a social science, in the same way as or similarly to Economics and Administration, for example. However, it is also considered an exact science, just like Economics, for example. Here in Brazil, accounting professionals in general are called contabilistas or contadores (accountants), but there are also accounting technicians.

Those who complete higher education courses in Accounting Sciences receive a Bachelor's degree in Accounting Sciences. The title of contador (accountant) is given to bachelors who pass the sufficiency exam of the CFC - Federal Accounting Council, analogous or similar to the OAB (Brazilian Bar Association) exams, mandatory for those who want to practice the profession of lawyer.

In addition, the title of accounting technician is given to professionals who have technical-level training and who obtained their registration by 2015. As of 2016, the Federal Accounting Council determined the existence of more than 572,000 accounting professionals and more than 53,000 active accounting organizations, such as accounting firms, for example, in Brazil.

Accountant's Day is celebrated on September 22nd, while the Contabilista Day is celebrated on April 25th.

HISTORY

ACCOUNTING IN THE WORLD

There are reports that the first accounting manifestations date back to about 2,000 before the birth of Jesus Christ, with the Sumerians, and some say that the written language of the time was invented by primitive accountants. At the time, in a market based on the exchange of goods—that is, barter—accounting served to define how much someone possessed of a certain commodity and what the exchange value of that commodity was in relation to another.

Millennia later, Accounting began empirically with Leonardo Fibonacci, a renowned Italian mathematician. Later, with the monk Luca Pacioli, also an Italian mathematician and the main promoter of the double-entry method, the empirical and less organized phase of Accounting ended in the 15th century, beginning its scientific phase, and therefore, more precise.

In the time of King Dom Fernando I, in the Kingdom of Portugal, it was the accountants and doorkeepers who performed the functions of accountants and were accountable to the overseers of the Treasury of the Royal House.

Until the first half of the 1970s, the technical professional of the trade was also known as a "guarda-livros" (bookkeeper), equivalent to the English term bookkeeper, but the term fell into disuse.

The increasing complexity of corporations and governments led to a societal concern with the organization of accounting activity. Until the mid-20th century, many authors saw it as a process; some called it historical accounting for this reason. With the popularization of the systems view and the advent of structuralism, which began to be developed in Economics and Sociology, accounting authors began to think in structuralist terms.

In Brazil, for example, given the peculiarities of the application of the subject, a system of functions was proposed to meet the three main accounting objectives: recording, control, and information. But other proposals would soon arise, aiming to satisfy different users of accounting activity:

In Economics, it was proposed that Accounting be a system inserted within larger economic systems, such as that of companies (microeconomics) and governments (macroeconomics). In this way, the use of Mathematics and Statistics to obtain and interpret accounting information began to be seen naturally.
In Administration, a proposal emerged for a system based on accounting principles, capable of organizing the activity for the purposes of meeting the standardization of accounting information and other needs of administrators in general.

In countries like Brazil, where legislation is a decisive factor in the final form the activity will take, there is the idea of the Accounting system being a bookkeeping system. Cost accounting, for example, is seen by legislators as a system separate from the accounting system, with a provision that allows the company to choose whether or not to integrate the cost system into its bookkeeping.

All three types of proposals above have undergone numerous modifications over the years, seeking to keep up with the accelerated development of economic and administrative activities. In more recent decades, computerized accounting systems have resulted in the most profound innovation for the activity of Accounting.

But, contrary to what it might seem, these computerized systems have not totally eliminated traditional Accounting. They organize data into information like any administrative software, but without the scientific and professional accounting knowledge capable of working this infinite range of information, they will not be able to serve rulers, investors, inspectors, and managers.

ACCOUNTING IN BRAZIL

Starting in 1770, the first regulation of the accounting profession in Brazilian lands appeared, when Dom José, King of Portugal, issued a Letter of Law to all Lusitanian domains. In this document, among other regulations, the mandatory registration of all bookkeepers in the commercial board was established.

In 1808, the Portuguese Court issued a decree that included guidance for compliance with a standard of mercantile bookkeeping by double entries, increasing the precision of the work. Years later, in 1870, there was the first Brazilian regulation of the accounting profession, through Imperial Decree 4,475. The Association of Bookkeepers of the Court was officially recognized, considered the first regulated liberal profession in the country.

During this period, the first steps were taken toward the improvement of the field. In public accounting, only bookkeepers who had taken commerce classes were admitted. The practice of the profession required a multidisciplinary character; that is, to be a bookkeeper, it was necessary to have knowledge of the Portuguese and French languages, exquisite handwriting, and later, with the arrival of the typewriter, to be efficient in typing techniques.

In 1902, then-President Rodrigues Alves declared as being of public utility, with official character, the diplomas conferred by the Academy of Commerce of Rio de Janeiro, Practical School of Commerce of São Paulo, Commercial Institute of the Federal District, and Academy of Commerce of Juiz de Fora.

In 1915, the Brazilian Institute of Tax Accountants was founded. The following year, the Association of Accountants of São Paulo and the Brazilian Institute of Accounting were established in Rio de Janeiro. Nine years later, in 1924, the 1st Brazilian Accounting Congress was held, and the foundations were laid for the campaign for the regulation of the profession of accountant and the reform of commercial education in Brazil.

Articulations for the development of the accounting profession grew and, in 1927, the Perpetual Council was founded, an embryo of what would become, in the 21st century, the CFC (Federal Accounting Council) and CRC (Regional Accounting Council) system. The institution housed the General Regime of Accountants in Brazil, which granted registration to new professionals fit to develop the activity of accountants.

This period was marked by political turbulence, revolutions, and the arrival of Getúlio Vargas to power in 1930.

In 1931, the first major victory for the accounting class came, as Federal Decree No. 20,158 was sanctioned, which organized commercial education and regulated the profession. The Accounting course was created, which trained two types of professionals: bookkeepers, who studied for two years, and expert-accountants, who studied for three years.

In the following year, Federal Decree No. 21,033 was sanctioned, establishing new conditions for the registration of accountants and bookkeepers. With this law, the problem of professionals in the field who possessed only empirical, practical knowledge was solved, determining the conditions and deadlines for the registration of these professionals. From that moment on, the exercise of the accounting profession became indissolubly linked to school preparation; that is, whoever wished to embrace the career of accountant and contabilista would have to study first.

This victory marked the trajectory of the profession in Brazil, being widely celebrated by the leaders of the field at the time. With this, efforts multiplied for the creation of the CFC - Federal Accounting Council, following the example of what already happened in engineering and law, until then the only ones at university level regulated in the country.

The immediate creation of the CFC - Federal Accounting Council, right after the enactment of Decree-Law No. 9,295, demonstrated the haste they had to see their professional body in operation. As soon as it was installed, the CFC began to act to fulfill the function for which it was created. One of the first measures of this council was to create the conditions for the installation and operation of the regional councils. Today, there is an accounting council in each unit of the federation—that is, for each Brazilian state.

The first actions of the regional councils were directed toward the registration of professionals. A short time later, inspection activities began. The regional accounting councils currently, in addition to registering and supervising professional practice, promote continuing education, both in partnerships with the Federal Council and in partnerships with universities in general, offering accounting professionals conditions to qualify themselves and meet the demands of the labor market.

OBJECTIVES OF ACCOUNTING

Accounting is a science that studies and evaluates the equity of entities through the recording of accounting facts, through the methodical exposition of facts, and through the interpretation of these facts, helping their managers to make more precise decisions about the directions to be taken by organizations—both for-profit organizations, such as companies, and non-profit organizations, such as philanthropic entities.

Among the main objectives or objects of Accounting are the cash flow and the net equity of the entity, the latter formed by the set of assets, rights, and obligations (debts), generating information so that its various users become aware of its current and previous state, helping them to make comparisons between one period and another and to make decisions about the directions of the entity.

According to International Accounting Standards (The Conceptual Framework for Financial Reporting — IASB – BV 2011 Blue Book), the objective of Accounting is to generate useful economic information for any person interested in knowing the actual performance of the reporting entity, including public administrators and public servants in general; investors and executives of private and mixed-capital companies; administrators of non-profit entities, such as philanthropic hospitals, for example; government inspectors and regulatory agencies that supervise and regulate the operation of private and mixed-capital companies; unions; financial institutions in general, such as banks; suppliers of inputs; among other interested parties.

For example, the information generated by Accounting should help current and potential investors and creditors make investment and credit decisions, respectively. To evaluate the entity's prospects in terms of future cash flow inflows, existing and potential investors, lenders, and other creditors need information about the entity's cash generation, the entity's resources, and the liabilities (debts) against the entity. Furthermore, they need to know how efficiently the entity's management and its board of directors have fulfilled their responsibilities in the use of the entity's resources.

This information can help users assess the liquidity and solvency (financial viability) of the reporting entity, its needs in terms of additional financing, and how likely its attempt to raise such financing will be successful. Information about priorities and payment requirements of current claims helps users predict how future cash flows will be distributed among those with claims (credits) against the reporting entity.

In general, the objectives of Accounting vary according to the field of Accounting; that is, it depends on each of the segments or subdivisions of Accounting. Examples of subdivisions include:

Environmental Accounting aims to generate information involving the interaction of the company with the environment, which is useful for the decision-making of internal and external users. As a vehicle for disseminating the company's environmental information, it can offer the necessary tools for the control and disclosure of the environmental management process implemented by companies, according to the set objectives;
The objectives of Financial Accounting come from regulatory bodies, especially the IASB – International Accounting Standard Board at the global level, the FASB – Financial Accounting Standard Board in the North American environment, and the CVM – Securities and Exchange Commission (Comissão de Valores Mobiliários) regarding Brazil. The objective of Financial Accounting is to generate general-purpose accounting-financial reports, such as the Balance Sheet and the Income Statement for the Year;
The objective of Public Accounting, also known as Accounting Applied to the Public Sector, is to provide users with information about the results achieved and the aspects of a budgetary, economic, financial, and physical nature of the equity of public sector entities—such as city halls, state governments, and the Federal Government—and the changes in their equity, in support of the decision-making process of public managers; adequate accountability; and the necessary support for the implementation of social control;
The objectives of Cost Accounting are to measure and demonstrate financial and non-financial information related to the acquisition and consumption of resources by private or mixed organizations. It should provide information to compute the cost of services, products, and other objects of management interest; provide information for planning and control; and provide information for managers' decision-making;
National Accounting aims to measure the main macroeconomic aggregates of a country, used in Economics as well. It is an accounting system that allows the evaluation of the economic activity in general of a given country. It aims to show the economic situation of a country or region, mainly in quantitative terms;

For Horngren, Foster, and Datar (2000), Accounting must provide information to meet the following objectives:

Formulation of general strategies and long-term plans of a company, including the development of new products and/or services and investments in tangible assets (real estate and movable property, for example) and intangible assets (brands, patents, and human resources, for example) and, frequently, includes the preparation of specific reports;
Resource allocation decisions of the company, with emphasis on the product/service and/or the customer, frequently involving the preparation of reports on the profitability of products and/or services, brand categories, customers, distribution channels, etc.;
Cost planning and control of the company's operations and activities, encompassing reports on revenues, costs, assets, and liabilities of divisions, factories, and other responsibility centers;
Measurement of performance and evaluation of the people directly involved in the company's activities, involving the comparative study of planned results with those obtained, which may be based on financial and/or non-financial measures;
Compliance with external regulations and legal requirements for the publication of statements, covering financial reports that are provided to partners/shareholders who are making decisions to buy, hold, or sell quotas or shares of the company;

ACCOUNTING STATEMENTS

In general, financial statements, also known as accounting statements, are the periodic accounting reports that support managers' decision-making in companies. The most important statements are:

BP - Balance Sheet (Balanço Patrimonial);
DRE - Income Statement for the Year (Demonstração do Resultado do Exercício);
DFC - Cash Flow Statement (Demonstração dos Fluxos de Caixa);
DMPL - Statement of Changes in Equity (Demonstração das Mutações do Patrimônio Líquido);
DVA - Value Added Statement (Demonstração do Valor Adicionado);

Other financial statements include:

DOAR - Statement of Origins and Applications of Resources;
DLPA - Statement of Retained Earnings or Accumulated Losses;
RG - Management Report; PAI - Independent Auditors' Report;

BALANCE SHEET

The balance sheet is the set of assets (generally goods) and liabilities (generally obligations) of a company. It is an accounting statement of assets and liabilities, including a statement of profits or losses and a statement of the company's equity. In the balance sheet, the asset (left side) comprises goods and rights, and the liability (right side) is composed of obligations, equity capital or social capital, and net equity.

The balance sheet is an important financial statement because it summarizes the company's equity; it is the company's obligation to prepare it at least once a year, when the fiscal year ends.

INCOME STATEMENT

The income statement for the year is a standardized summary of a company's revenues and expenses in a given period, with the objective of demonstrating the net result (profit or loss), including all elements related to that result. If total revenues, also known as billing, are greater than the total of expenses and/or costs, then the company will have a profit; otherwise, if total revenues do not cover expenses and/or costs, there will be a loss.

ACCOUNTING TECHNIQUES

In order to achieve its main purpose, which is to provide reliable and useful information about the financial and equity side of the entity to its investors, managers, and inspectors, accounting uses the following techniques:

Bookkeeping: Consists of performing, in a systematized manner, the records of occurrences that influence the entity's equity evolution. Bookkeeping, therefore, is carried out taking into account the chronological order of all events. The accounting technique of bookkeeping is based on supporting documents—that is, all events to be recorded must correspond to a legalized document that proves their veracity;
Accounting statements: Consists of presenting all records made in a condensed form, which shows the results achieved by the company in a given period. The recorded facts must appear in expository statements, which, according to Law 6,404/76, are called financial statements;
Auditing: A technique that seeks to ratify or rectify, depending on each case, the veracity and accuracy of the records already made and presented in the accounting statements or financial statements. In this context, the term ratify means to confirm, and the term rectify means to correct or alert investors and managers about a possible mistake, involuntary error, fraud, or inaccuracy in the entity's accounting. It consists of a detailed examination of all data recorded by accounting, verifying if all were performed following the fundamental principles of Accounting. This technique can be applied in two distinct ways: internal audit and external audit;
Balance sheet analysis: Taking into account that accounting statements represent systematized data presented in synthetic form and technical language of the entity's results, users—small investors, for example—do not always have the conditions to interpret them. Thus, it is up to the entity's own accounting to decompose, compare, and interpret the accounting statements, with the purpose of providing more agile and intelligible information for users;

ACCOUNTING ACCOUNTS

Accounting accounts are the essence of Accounting, which has even been called the "science of accounts." Without accounting accounts, preferably organized in Cartesian or rational form and recorded by the double-entry method, other information systems that use business data should be called management or administrative systems, but not accounting systems.

Accounting accounts must be expressed with titles in accordance with the administrative acts and facts provoked and appear in a chart of accounts, according to their characteristics, similarities, or economic events produced. An account must easily represent the operation performed by an entity, a company, for example.

According to article 178 of Law 6,404/76, "in the balance sheet, accounts will be classified according to the elements of equity they register and grouped in a way to facilitate the knowledge and analysis of the company's financial situation."

DEBIT AND CREDIT

In accounting books, debits are recorded or inscribed on the left side of the accounts and credits on the right side. By the double-entry method, each operation corresponds to an operation on the opposite side—that is, one or more debits correspond to one or more credits, and the sum of the credits will or must be equal to the sum of the corresponding debits. If an account has more debits than credits, it will have a debit balance, and if it has more credits than debits, it will have a credit balance.

The fact that the origins (creditors) and destinations (debtors) of resources are identified makes the concepts of debit and credit difficult to understand at first sight, since they are "erroneously" associated with decreases and increases in capital, respectively. In other words: it is believed, "erroneously," that debit is always bad and that credit is always good.

The language used exclusively within Accounting can be confusing for those not used to it, for those outside of it. In some accounting contexts, the term credit may be used as a decrease and the term debit may be used as an addition. In our common day-to-day language, the term credit always has the sense of something positive, something that enters our equity, and the term debit always has a negative sense, of something we owe and/or pay.

Truth be told, this language used exclusively within Accounting should have been abolished long ago, since it only causes confusion and does not contribute positively to a more easily understood, more inclusive, and less elitist Accounting. However, for some reason, accounting professional bodies, regulatory agencies, and governments insist on using it, which is a pity.

EQUITY / PATRIMONY

In general, equity/patrimony is the set of assets, rights, and obligations of a natural person or a legal entity, valued in currency. In an Accounting context, net equity is everything the owner, shareholder, or partner of a company is entitled to in financial terms, and which constitutes the non-callable part of the balance sheet, including the sum of social capital, reserves, goodwill, provisions, and subtracting, obviously, the obligations or debts of the company.

EXPENSES AND/OR COSTS

An expense and/or cost is an expenditure relative to the good or work consumed or used directly in the production of other goods and/or the provision of services, recognized as a cost only when considered a production factor for the manufacture of something or provision of a service. For example: The cost of acquiring raw materials (wheat flour, for example) for the production of cakes, cookies, and breads for sale in bakeries and supermarkets. An expense can also be considered the expenditure of a company on salaries and inputs of its administrative departments, such as accounting, treasury, personnel department, presidency, and/or board of directors.

An expense is an expenditure relative to the good or service consumed or used directly or indirectly to obtain revenues; they are items that reduce net equity and have the characteristic of representing a necessity in the process of obtaining revenues. For example: Communication equipment (telephone, for example), used in the accounting and human resources departments of an organization, which were transformed into necessary investments to obtain revenues.

ASSET

According to the Michaelis Dictionary, for example, an asset is the economic resource of an entity, a company, for example, that can be objectively measured in financial terms, including physical properties, such as real estate and machinery, and intangible rights, such as brands and patents. According to the Larousse Dictionary, for example, an asset is the set of goods and credits (accounts receivable) that constitute the equity of a commercial, industrial, or service-providing company.

LIABILITY

In the balance sheet, the liability is one of the components of an entity's equity; it is on the right side of the balance sheet. In general, it is one of the elements used to calculate the net equity of an entity, for-profit or non-profit. However, to avoid misunderstandings, it is recommended to treat it as everything the organization owes, whether to creditors and/or to its owners (partners or shareholders).

EQUITY SITUATIONS

In general, the difference between what an organization has in assets and has in liabilities is usually called the net situation or net equity. There are only three types of equity situation: positive net equity, neutral net equity, and negative net equity:

A positive equity situation, also known as positive net equity, occurs when the organization (a company, for example) possesses goods (movable, real estate, and merchandise, for example) and rights (bills receivable, for example) in a value higher than its debts/obligations—that is, when the organization possesses its own wealth;

A neutral equity situation, also known as a neutral net situation, balanced net situation, and neutral net equity, occurs when the organization possesses goods and rights in a value identical or very close to its debts/obligations;

A negative equity situation, also known as negative net equity, occurs when the organization does not possess enough goods and rights to cover its debts/obligations—that is, when it has a deficiency in assets (passivo a descoberto), which means that, from a technical point of view, the organization is broken or bankrupt;

ACCOUNTING PRINCIPLES

Here in Brazil, since Law No. 6,404/1976, also known as the Corporate Law (Lei das S.A.), included them as legislative matters to be observed by capital market agents, accounting principles have been used by official regulatory bodies. The CFC – Federal Accounting Council, for example, defined a first version in 1981, followed by the CVM – Securities and Exchange Commission, which issued Deliberation 29/1986 in 1986, classifying them into postulates, principles proper, and conventions.

Subsequently, in the following years, other deliberations from the CFC and the CVM were issued regarding accounting principles, making adjustments and improvements, but also ceasing to treat them as postulates, principles, and conventions, starting to treat them as basic assumptions and qualitative characteristics.

In practice, accounting principles can be observed in the exercise of the accounting profession and constitute a condition of legitimacy for the NBC's – Brazilian Accounting Standards. Furthermore, in the application of fundamental accounting principles to concrete situations, the essence of transactions must prevail over their formal aspects.

Resolution No. 750/1993 of the CFC defines accounting principles, which are endowed with universality and generality, elements that characterize scientific knowledge, along with certainty, method, and the search for primary causes.

The accounting principles, therefore, are as follows:

ENTITY PRINCIPLE

Accounting must have full distinction and separation between the natural person and the legal entity. For those who do not know, a natural person is a human being and a legal entity is an entity formed by one or more natural and/or legal persons with a specific purpose, such as obtaining profit or providing a non-profit social service. A legal entity can be a company or a philanthropic entity, such as a hospital.

In short, the company's equity is never confused with the equity of its partners. The company's accounting records only the acts and facts that occurred referring to the company's equity and not those related to the private equity of its partners. Transactions of one company are not mixed with those of another, even if both are from the same business group. Therefore, the individuality of each entity is respected.

According to Resolution No. 750/1993 of the CFC, in its art. 4, the entity principle recognizes equity as the object of Accounting and affirms equity autonomy, the need for differentiation of a particular equity in the universe of existing equities, regardless of whether it belongs to one person, a set of persons, a society, or an institution of any nature or purpose, for-profit or non-profit.

Therefore, the company must record only facts that refer to its equity. For example, one should not record a partner's private bill as a company expense, such as a hotel stay, unless, of course, the partner's daily rate is related to the work performed at the company itself. In other words, the company's cash should not be used to pay a private bill of one of its partners.

CONTINUITY PRINCIPLE

The accounting principle of continuity was recognized in art. 5 of Resolution No. 750/1993 of the CFC. Continuity means that Accounting evaluates equity and records its changes considering that the entity, until evidence to the contrary, will have its life continued over time.

It is the basic assumption that the entity, whose equity is being accounted for, is not destined for liquidation or any form of extinction, but rather to continue operating for an indefinite, continuous period. This does not mean that the idea of continuity is never abandoned, because when there is evidence that the company will be discontinued—that is, closed—due to financial difficulty, deliberation of the partners themselves, or another cause, this fact must then necessarily be considered.

However, from the moment one works with the hypothesis of the company's discontinuity—that is, its closure—most of the other accounting principles are no longer used, and the principles of evaluation and classification of accounting statements change completely.

If a situation unfavorable to its continuity occurs, the entity (company, for example) may be investigated by the accounting council, and may consequently be closed, ending its activities. In Brazil, punishments for accounting errors and fraud focus on administrators and accountants, also including external auditors. Accountants, in addition to professional sanctions provided for in CFC standards, may suffer punishments provided for in the Penal Code, the Civil Code, and Income Tax legislation. Furthermore, the BACEN – Central Bank of Brazil has the power to shut down the activities of financial institutions that cause crimes against the SFN – National Financial System.

OPPORTUNITY PRINCIPLE

Refers to the moment when the entity's equity variations must be recorded, which must be done immediately and fully, regardless of the causes that originated them, covering physical and monetary aspects. The integrity of the records is of fundamental importance for the analysis of equity elements, as all accounting facts must be recorded, including those of branches, subsidiaries, and other dependencies of the same entity.

For example, if a future fact is dealt with, the record must be made immediately if its value can be proven. These are the cases of provisions for expenses/costs, such as vacations, 13th-month salary, contingencies, etc.

RECORDING AT ORIGINAL VALUE

According to the principle of recording at original value, equity elements must be recorded by accounting by their original values, expressed in the country's current currency—in the Brazilian case, the Real. Thus, accounting records are made based on the acquisition value of the good or the manufacturing cost, also including all expenditures that were necessary to place the good in conditions to generate present or future benefits for the company.

If transactions are carried out in foreign currency, the corresponding values must be converted to the national currency. For example, the accountant must record the accounting facts of a company's closure on the date of their occurrence, in a complete and timely manner, so that its users, based on this information, also record these facts in their companies in general.

PRINCIPLE OF MONETARY CORRECTION

PRINCIPLE OF MONETARY UPDATING

In Brazil, with the advent of the Plano Real, an economic stabilization plan launched in 1994 during the government of then-President of the Republic Itamar Franco, "monetary correction of balance sheets" was vetoed. There was a change in the name of the principle of monetary correction, which came to be called the principle of monetary updating, obeying an international Accounting standard.

But even with regulations meeting the international standard, there was tension in the accounting field in Brazil, including between regulatory bodies (the CFC and the CVM) and the class of workers in the Accounting area, because of the resolution that allows monetary correction only if inflation exceeds a certain level (if inflation exceeds 100% in three years), as the class understands there are distortions in the value of equity in a few years, even when inflation is low.

ACCRUAL PRINCIPLE

(PRINCÍPIO DA COMPETÊNCIA)

The Accrual Principle determines that the effects of transactions and other events, regardless of whether received or not, must be recorded in the periods in which the transaction took place. This occurs because this principle is not linked to receipts and payments, but rather to revenues earned and expenses incurred in a given period. Therefore, the recording of all revenues and expenses according to the triggering event must be prioritized, in the accrual period, regardless of whether revenues were received or expenses were paid.

Revenue is considered realized at the moment the good is sold to the customer or the service is provided to them, making the payment or assuming a firm commitment to do so in the future, such as in a credit sale; when an obligation is extinguished without the concomitant disappearance of a good or right, such as in the forgiveness of debts or interest due; by the natural increase of goods or rights, such as interest on financial applications; and in the actual receipt of donations and grants;

The expense is considered incurred when the consumption of a good or right occurs, such as in the use of machines, with their consequent devaluation by wear and tear; when an obligation arises without the corresponding increase in goods or rights, such as in labor contingencies; when the corresponding value of the good or right ceases to exist due to its transfer of ownership to a third party, such as the write-off of goods from inventory upon effective sale;

PRUDENCE PRINCIPLE

This principle specifies that, if there are two equally valid alternatives for the evaluation of equity and the quantification of equity variation, the lower value will be adopted for goods or rights and the higher value for obligations or liabilities. Thus, when equally acceptable options are presented in view of other fundamental Accounting principles, the option that decreases or adds less value to net equity will be chosen.

Within the business and/or governmental environment, in the context of Accounting, Economics, Statistics, and other sciences, this principle is usually also extended to treat or make assessments of other conjunctures and/or contexts, with the use of expressions such as “conservative evaluations,” “conservative forecasts,” “conservative scenarios,” and “conservative provisions,” among other equivalent expressions.

In the specific context of Accounting, it is based on the premise of never anticipating profits and always forecasting possible losses.

Essentially, it results from the adoption of the lower value for asset components and the higher value for liability components, whenever equally valid alternatives for accounting recording are presented. This will directly reflect on the company's net equity. In this way, the application of the prudence principle results in obtaining the lowest possible net equity among those possible in view of alternative procedures for evaluating accountable facts.

This principle aims, on one hand, not to record any profit prematurely or hastily and, on the other, to record all expenses and losses that are possible. In summary, never allow the company's accounting to indicate the existence of profits that may be overestimated by the adoption of a criterion, among two or more possible ones, that may eventually not correspond to reality. The correct application of this principle aims to prevent purely personal (subjective) judgments or other interests foreign to accounting rigor from prevailing in bookkeeping; that is, an entity's accounting must be objective, not subjective. In summary, among several valid alternatives for revenues, consider the one of lower value; and for expenses, the one of higher value.

A typical example: in a labor debt that is being judged in Labor Court, the company expects to pay a lawsuit between R$ 3,000.00 and R$ 6,000.00, according to its previous calculations, so it records the higher value in its accounting, i.e., R$ 6,000.00, even if there are more chances of paying a lower value.

ACCOUNTING CONVENTIONS

Accounting conventions are concepts used to increase the reliability, precision, and quality of accounting principles and, consequently, of the instruments provided by accounting, including the DRE (Income Statement), the BP (Balance Sheet), and the DFC (Cash Flow Statement):

OBJECTIVITY CONVENTION

To carry out accounting records, documents are necessary—invoices, for example—that adequately prove the value of the good being acquired by the entity, the expense or cost of another type it is making, and the product or service being sold. The objective of this convention is to avoid the excessive and liberal use of subjective values in the evaluation of the entity's goods, rights, and obligations.

MATERIALITY CONVENTION

In theory, accounting should allocate more time and effort to recording events or facts of greater importance, of greater value. The objective of this concept is to avoid unnecessary delays in presenting periodic results to accounting users, such as investors, avoiding waste of time for the evaluation and recording of events or facts of lesser importance, of lesser value.

This does not mean that lower-value revenues and expenses should not be recorded; on the contrary, all money that enters and leaves the company must be recorded, even if of low value. The goal of this concept is to prevent accountants from spending too much time on less important things and, consequently, to avoid delays in the presentation of accounting statements, for example.

CONSERVATISM CONVENTION

According to this concept, whenever the accountant is faced with a situation where there are two valid alternatives for evaluating the weight of an expense, a cost, a revenue (a credit, for example), and a good that is part of the entity's equity (a brand or patent, for example), they must give preference to the alternative of higher value for the expense or cost and lower value for a revenue or good. This convention is similar or equivalent to the prudence principle.

CONSISTENCY CONVENTION

This concept establishes that frequent changes in the way an entity's accounting is performed should be avoided, to prevent accounting users from having difficulty or becoming confused when comparing an accounting statement from a given period with the statement from another period.

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