Accounting principles: what they are and how to apply them

Accounting principles are the fundamental rules governing the recording and presentation of financial information. The Spanish General Chart of Accounts establishes six principles that every company must follow so that its accounts reflect a true and fair view of its financial position.

What are accounting principles

Accounting principles are a set of basic rules that guide the preparation of financial information. Their purpose is to ensure that financial statements are reliable, comparable and useful for decision-making.

In Spain, these principles are set out in the first part of the General Chart of Accounts (PGC), approved by Royal Decree 1514/2007. When there is a conflict between principles, the one that best leads to a true and fair view of the company's assets, financial position and results must prevail.

The six accounting principles of the PGC

Going concern principle

This principle states that accounts must be prepared on the assumption that the company will continue its operations indefinitely, with no intention to liquidate or significantly reduce its activities.

Practical implication: assets are valued at their acquisition or production cost, not at their liquidation value. If there are well-founded doubts about the company's continuity, this must be disclosed in the notes to the accounts.

Accrual principle

Income and expenses must be recorded at the time they are economically incurred, regardless of when the actual payment or receipt takes place.

Example: if a company provides a service in December but receives payment in January of the following year, the income must be recorded in December, when the obligation was generated.

Consistency principle

Once an accounting method is adopted from among the alternatives permitted by the regulations, it must be maintained consistently over time and applied uniformly to similar transactions.

Practical implication: if a company decides to depreciate a type of machinery using the straight-line method, it must apply the same method to all machinery in that category. It may only change the method if justified, and must disclose the change and its effect in the notes.

Prudence principle

This requires risks and losses to be recorded as soon as they are known, even if they have not yet materialised. Conversely, profits should only be recorded when they have been effectively realised.

Example: if a company has a client with financial difficulties and it is likely that an invoice will not be paid, the potential loss must be provisioned even though non-payment has not yet been confirmed. However, income from a contract that has not yet been signed should not be recognised.

No offsetting principle

This prohibits offsetting asset items against liability items, or income against expenses. Each element must be valued and presented separately.

Example: if the company has a bank loan (liability) and a deposit at the same bank (asset), it cannot present only the net difference between the two. Each must appear independently on the balance sheet.

Materiality principle

This allows the strict application of an accounting principle to be waived when the resulting variation is insignificant and does not alter the true and fair view of the annual accounts.

Practical implication: a low-value office supply could be expensed directly rather than capitalised as a depreciable asset, since its impact on the annual accounts is negligible.

True and fair view as the overriding objective

All accounting principles are subordinate to the concept of true and fair view. This means that the annual accounts must provide a truthful and complete representation of the company's assets, financial position and results.

If the strict application of an accounting principle does not allow a true and fair view to be achieved, the company must depart from that principle and disclose this in the notes, explaining the reason and the quantitative impact.

Accounting principles vs. Conceptual Framework

The 2007 PGC incorporated the Conceptual Framework of Accounting, which goes beyond the six principles and includes:

• Information requirements: relevance, reliability, comparability and clarity.
• Recognition criteria: when elements should be recognised in the accounts.
• Measurement criteria: historical cost, fair value, net realisable value, present value, value in use and amortised cost.

The accounting principles are integrated within this broader framework, which provides a complete conceptual basis for the preparation of financial information.

Relationship with international standards

The accounting principles of the Spanish PGC are aligned with the International Financial Reporting Standards (IFRS), adopted by the European Union. The main differences are found in:

• The greater weight of fair value under IFRS compared to historical cost under the PGC.
• The prevalence of substance over form in international standards.
• The treatment of certain financial instruments.

Listed companies must apply IFRS in their consolidated statements, while unlisted companies follow the PGC.

How to apply accounting principles with Holded

Holded makes it easy to comply with accounting principles by providing:

• A chart of accounts based on the PGC that ensures the correct classification of transactions.
• Automatic recording of income and expenses under the accrual principle.
• Depreciation management with consistent, automated criteria.
• Itemised presentation of assets, liabilities, income and expenses without improper offsetting.
• Generation of annual accounts that reflect a true and fair view of the business.