Basic accounting concepts for businesses and self-employed professionals

Understanding the basic concepts of accounting is essential for correctly managing any business. This guide covers the fundamental terms that every business owner and self-employed professional should know to make informed financial decisions.

What is accounting

Accounting is the discipline responsible for recording, classifying and summarising all economic transactions of a company. Its objective is to provide useful financial information for decision-making, both internally (management) and externally (investors, public authorities, financial institutions).

The General Chart of Accounts

The General Chart of Accounts (Plan General de Contabilidad, PGC) is the regulatory framework that establishes accounting rules in Spain. It defines the structure of accounts, valuation criteria and the models for annual accounts.

There are two versions:

• Standard PGC: for larger companies.
• SME PGC: a simplified version for small and medium-sized enterprises that meet certain requirements.

Fundamental concepts

Assets

Assets encompass all the goods and rights owned by the company from which it expects to obtain future benefits. They are classified into:

• Non-current assets: long-term assets such as property, machinery or patents.
• Current assets: short-term assets such as merchandise, bank deposits or outstanding invoices.

Liabilities

Liabilities are all the debts and obligations the company has with third parties:

• Non-current liabilities: long-term debts (bank loans, mortgages).
• Current liabilities: short-term debts (suppliers, creditors, outstanding taxes).

Equity

Equity is the difference between assets and liabilities. It represents the company's own resources: capital contributed by the partners plus accumulated profits.

Debit and credit

In double-entry bookkeeping, each transaction is recorded in at least two accounts:

• Debit: placed on the left side of the account. It reflects increases in assets and expenses, and decreases in liabilities, equity and income.
• Credit: placed on the right side. It reflects increases in liabilities, equity and income, and decreases in assets and expenses.

Journal entry

A journal entry is the record of an economic transaction in the Day Book (Libro Diario). It must always satisfy the fundamental rule: the total debits must equal the total credits.

Account

An account is the basic unit of recording. Each account has a numerical code (according to the PGC) and tracks the movements of a specific asset, liability or equity item. For example, account 572 corresponds to "Banks and credit institutions".

Income and expenses

Income

Income represents increases in equity arising from the company's activity. The most common types are:

• Sales of goods or products.
• Provision of services.
• Financial income (interest, dividends).
• Grants and exceptional income.

Expenses

Expenses are decreases in equity necessary to generate income:

• Purchases of goods or raw materials.
• Personnel costs (salaries, social security).
• External services (rent, utilities, consultancy).
• Financial expenses (loan interest).
• Depreciation and amortisation (loss of asset value).

Amortisation and depreciation

Amortisation (or depreciation) is the accounting reflection of the loss in value that fixed assets suffer due to use, the passage of time or obsolescence. It allows the cost of an asset to be spread over its useful life.

The most common methods are:

• Straight-line amortisation: the same amount is allocated each year.
• Declining balance method: a fixed percentage is applied to the remaining value to be amortised.
• Sum-of-the-years'-digits method: the charge is higher at the beginning and decreases over time.

Accrual principle

The accrual principle states that income and expenses must be recorded at the time they are generated, regardless of when the actual payment or receipt occurs. It is one of the most important accounting principles and directly affects how the results for the financial year are calculated.

Profit and loss account

The profit and loss account (P&L) is the financial statement that reflects the economic result for the period. It is calculated as the difference between income and expenses:

• Positive result (profit): income exceeds expenses.
• Negative result (loss): expenses exceed income.

The P&L is structured in several levels:

• Operating result (core business activity).
• Financial result (financial operations).
• Result before taxes.
• Result for the period (after taxes).

Bank reconciliation

Bank reconciliation is the process of verifying that the company's accounting records match the bank statement transactions. It helps detect errors, duplicates or unrecorded transactions.

How to simplify accounting with Holded

With Holded you can manage all your company's accounting simply and automatically:

• Automatic recording of journal entries from invoices and payments.
• Pre-configured chart of accounts based on the PGC.
• Automatic bank reconciliation.
• Real-time generation of the profit and loss account and balance sheet.
• Full control of income and expenses with visual dashboards.