Accounting: what it is and its importance for companies

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Accounting is the science that studies the assets movements (assets, rights and obligations) in organizations. Through accounting, the economic and financial statements that form the basis for various day-to-day and mandatory operations of any formally constituted entity such as payment of charges and taxes are generated.

What are the Benefits of Accounting

1. Understand the key financial metrics of your business
2. Make better data-based decisions
3. Keep a reliable history of your business
4. Comply with tax obligations
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How to Make My Accounting?

Under federal law, any company is either for-profit or not, it must carry out its accounting.

Law 10.406 / 2002 (New Civil Code), art. 1.179 - The entrepreneur and the company are obliged to follow a mechanized accounting system, based on the uniform bookkeeping of their books, in accordance with their respective documentation, and to annually balance sheet and that of economic result.

In addition to performing the accounting, this also needs to be done and signed by an accountant registered in the CRC (Regional Accounting Council). However, it must be understood that there are two branches of accounting: managerial and financial.

Management Accounting vs. Financial Accounting

Although the main methods, calculations and indicators are used universally in accounting, there are different applications for accounting that should be perceived:

Management: this is the modality usually used by the managers themselves, since it has no commitment to the standards of the law. So you can, squeeze using accounting principles and tools, make customizations that give you more relevant data about your business.

Financial: this is the most traditional mode performed by accounting offices. Although it also provides interesting data for management, it is tied to government and bank standards, so it does not have flexibility.

Main Accounting Methods

I do not want here to simplify the wealth of tools that exist in accounting, but you will commonly hear about these key tools:

Cash flow: is the vision of the financial inflows and outflows of your business according to the cash scheme. That is, focused when money actually entered or left, regardless of the date that was previously expected.

Statement of Income for the Year: is the vision of the financial inflows and outflows of your business according to the accrual basis. That is, focused on when money should have come in and out. It is completely at the cash flow.

Balance Sheet: is the picture of the financial situation and capital structure of a business at any given time. It is basically focused on two pillars: Assets (assets and rights) and Liabilities (bonds). From the balance sheet it is possible to generate several accounting indicators that we will see later.
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Intersection between Accounting and Law

One big question that exists around accounting is the limit of it with the right. In other words, it is knowing in which situations to seek an accountant or a lawyer. What happens is that the process of opening companies, carried out by accountants, has several legal elements such as the case of the social contract.

In small businesses, the accountant usually recommends and guides a standard contract, but in businesses with a more complex corporate structure, a lawyer is required.

In addition, there are the issues of taxes and taxes. On ordinary occasions, the accountant knows how to act because it is already market practice and will be enough. But if your company is innovating, you will need a legal opinion to understand its framework and also your risk.

Main Accounting Terms

Below is a brief list of terms you will come across as you delve deeper into cash flow, dre, or balance sheet studies:

1. Amortization: is the value of the periodic abatement of a value. For example, if you paid actual 20 for an actual 100 debt. This means that you have repaid R $ 20 or 20% of the debt.
2. To rent: is the fixed-term rent of an asset. For example, you can lease a farm by paying a fixed amount to the owner, but getting all the profit you can generate.
3. Active: is the set of goods and rights of an organization. Goods can be real estate, vehicles, etc. Rights are usually future earnings guaranteed by contract.
4. Current assets: These are the assets that can be received in at most 1 year. Enter money into account, stocks, duplicates, etc.
5. Permanent assets: Opposite to current, are those that will be fixed for more than one accounting year. Usually they are long term investments.
6. Share capital: It is the amount defined in the articles of association or bylaws that will define the participation of the partners or shareholders of the company.
7. Available: It refers to any cash immediately available as cashier, bank account checks for collections.
8. Social exercise: It is the period of 12 months in which each organization must determine its result. It may or may not coincide with the calendar-year (January-December)
9. Passive: Obligations of the organization that must generate capital outflows.
10. Current Liabilities: Short-term obligations to be paid in less than 1 year.
11. Liabilities Liabilities: Are obligations to third parties that become creditors of the organization
12. Non-Current Liabilities: They are the obligations that only sell in the following fiscal year.
13. Net worth: Value that the owners of the company has applied: It includes the capital stock, capital reserves, and profits.

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The Main Accounting Indicators

Although there are dozens of different indicators that can be drawn from a statement of cash flow or operating result such as profitability and operating profit, when we refer to accounting indicators, we are talking about those indicators extracted from the balance sheet.

1. Liquidity Ratios

a) Current Liquidity: has the purpose of evaluating the balance between current assets and current liabilities.

LC = Current Assets / Current Liabilities

The higher this result, the better, as this indicates that the company has more assets than liabilities.

b) Immediate liquidity: means how much the company has available immediately to cover its liabilities.

LI = Available / Current Liabilities

Again, the higher the score, the better, as this indicates immediate ability to pay your bills.

c) General Liquidity: this indicator takes into account all assets and liabilities in both the short and long term.

LG = (Current Assets + Non-Current Assets) / (Current Liabilities + Non-Current Liabilities)

Like all liquidity ratios, the higher the better.

2. Indices of Indebtedness

a) Degree of Indebtedness: indicates the percentage of third-party capital compared to the equity of the company

GE = (Equity Capital / Equity) * 100

In that case, the less one depends on third-party capital, the better.

b) Composition of Indebtedness: It analyzes the ratio between short- and long-term liabilities.

CE = (Current Liabilities / Third Party Capital) * 100

The smaller the better, as this indicates that your debts are spread over time.

c) Impairment of Shareholders' Equity: indicates how much of the company's equity is invested in permanent assets.

IPL = Permanent Assets / Shareholders' Equity

The smaller, the better, because it indicates that your own capital is not immobilized and allows you greater freedom of payment / negotiation of media.

3. Profitability Indicators

a) Return on Investment: one of the most famous indicators of all, indicates how much money has returned to each monetary unit invested

ROI = (Net Income / Total Assets) * 100

The higher, the better, as it indicates that you are getting more return on your invested capital.

b) Return on Equity: points to the company's return on invested capital.

RPL = (Net Income / Shareholders' Equity) * 100

The bigger the better, because it indicates a higher return.

c) Net Operating Margin: is the percentage operating result that is left over from net revenue

MLO = (Earnings Before Financial Income / Expenses / Net Revenue) * 100

The higher, the better, because it indicates greater profitability of the business.

Like the post? Would you like to do these calculations for your company? Look our spreadsheets for accounting.

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  1. Oi Simone, the total MC is the total sales (85000) - the variable costs (55750) = 29.250
    The unitary MC is the selling price 17 - (variable costs divided by the total of products) = 17 - 11,15 = 5,85

  2. Good night
    My name is Simone, I am studying the Technician in Process Management, and I have to build a portfolio up to 07-05-2018 with some themes of Production Management, Cost Analysis, Logistics Processes and Microeconomics.
    It was me past the deadline last week, because my materials were all changed, if you can help me, I will be very grateful.

    1- Cost Analysis
    The Ferreira and Ferrari industry sold 5.000 units in March at the 17,00 unit price, with variable costs: 35.243,00 and 20.507,00. On the basis of these data determine what the value of the total contribution margin is unitary?

    5.000 und. X 17,00 = 85.000,00
    Sum of variable costs
    35.243,00 + 20.507,00 = 55.750,00

    MC = 85.000,00 - 55.750,00 = 29.250,00

    MC = 29.250,00 / 5.000 und.
    MC = 5.85 UNIT VALUE

    17,00 VALUE SOLD -5,85 UNIT VALUE =


    Total Contribution Margin = 5,85
    Contribution Margin = 11,15

    It is????

  3. Hi Paulo, it was to be 100 yes and a typo was 10. I just fixed it, thanks for the warning =]

  4. Very good text, thank you for sharing such information.

    Just to clarify in the first topic of Main Accounting Terms “1. Amortization: is the amount of the periodic reduction of a value. For example, if you paid 20 reais out of a 10 reais debt. It means that you have amortized R $ 20 or 20% of the debt. ”

    the number 10 (TEN) is right?

    it would not be 100


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