accounting macarie

8/12/2019 Accounting Macarie

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PUBLIC SECTOR ACCOUNTING

Conf. Dr. Felicia C. Macarie


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Content

1. ACCOUNTING AS A FORM OF KNOWLEDGE

1.1. Economic recording a component of the economic informational system

1.2. The tasks of accounting

1.3. Accounting functions

1.4. Accounting systems

2. THE OBJECT AND METHOD OF ACCOUNTING

2.1. The object of accounting

2.1.1. Theories regarding the object of accounting

2.1.2. The elements that compose the object of accounting

2.1.2.1. Economic goods

2.1.2.1.1 Non-current (fixed) assets

2.1.2.1.2. Current assets

2.1.2.2. Economic processes

2.1.2.3. Legal relations

2.2. The method of accounting

2.2.1. The principles of the accounting method

2.2.2. Procedures used in the accounting method

3. DOCUMENTATION A PROCEDURE OF THE ACCOUNTING METHOD.

3.1. The importance and editing of documents

3.2. Content and classification of documents

3.3. Standardization and verification of documents

3.4. The circulation of documents

3.5. Filing and maintenance of documents

3.6. Document restoring

4. THE BALANCE SHEET AND THE ACCOUNT - SPECIFIC PROCEDURES OF

ACCOUNTING

4.1. The balance sheet

4.1.1. Defining the balance sheet

4.1.2. The influence of economic operations on the balance sheet


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4.1.3. Case study number 1: the influence of economic operations on the balance sheet

4.2. THE ACCOUNT

4.2.1. The notion, necessity and economic content of the account

4.2.1.1. The connection between balance sheet and account at the beginning of the

management period

4.1.2.1. The connection between the balance sheet and the account at the end of the

reporting period

4.2.2. The functions of accounts

4.2.2.1. Functions performed by certain accounts

4.2.2.2. Functions performed by all accounts

4.2.3. The structure and form of accounts

4.2.3.1. The structure of the account

4.2.3.2. Case study number 2: the relationship between balance sheet and account,

account and balance sheet and the structure of the account

4.2.3.3. The form of the account

4.2.4. Account functioning rules

4.2.5. Double recording and accounts correspondence

4.2.5.1. Double recording

4.2.5.2. Accounts correspondence

4.2.6. Accounting analysis of economic operations

4.2.7. The accounting formula

4.2.8. Case study number 3: the accounting analysis

4.2.9. Accounts classification

4.2.10. Normalization (uniformization) of accounting in Romania

5. THE INVENTORY OF THE PATRIMONY

5.1. Definition, requirements and functions of the inventory.

5.2. Types of inventory

5.3. Inventory organization

5.3.1. Inventory preparations

5.3.2. The actual realization of the inventory

5.3.3. Establishment and usage of results

5.4. Case study number 4 regarding the inventory procedure


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6. THE TRIAL BALANCE

6.1. The definition, content and functions of the trial balance

6.2. Types of trial balances

6.3. Drafting the trial balance

6.4. Accounting errors that can be identified with the trial balance

7. PRACTICAL APPLICATIONS

Bibliography


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1. ACCOUNTING AS A FORM OF KNOWLEDGE

1.1. Economic recording a component of the economic informational system

The economic informational system is structured in three sub-systems: (1) economic

and financial planning, (2) economic recording and (3) financial law. The three sub-systems

are not independent of each other, but rather inter-dependent.

Economic recording is influenced by and influences the other two subsystems;

economic records are the main source of information, as they record, process and circulate

economic data.

Economic recording is a unitary systemwhich, based on well-established principles,

registers, tracks and controls: (1) economic goods and their source of provenience, and (2)

economic processes and their results. All these actions are undertaken with the aim of

knowing the economic and financial activities of a given patrimonial unit.

Economic recording has the following tasks:

- To reflect the economic processes and the results of these processes;

- To control the implementation of the revenues and expenditures budget and to compare the

predicted elements with those that are actually achieved;

- To record the patrimony of units;

- To determine the cost of production, revenues and overall financial results;

- To provide the information required to develop programs and budgets;

- To monitor the compliance and enforcement of the law; and

- To act as a source of information in decision making processes.

In order to fulfill these tasks, economic recording must meet the following conditions:

- To have its own methodology;

- To be organized on the bases of scientifically sound principles and rules;

- To provide (in a correct, effective and operative manner) all the information required to

characterize a phenomena, in order to provide support for decision-making processes;

- To be simple, clear, accurate, documented, uninterrupted and to timely reflect economic

phenomena and processes; and

- To be adaptable to the progress of economic activity.

Economic recording can be presented in three different forms: stock recording, statistics

and accounting.

The objective of stock recordingis to record, track and maintain operative control ofeconomic operations and phenomena at the time and place of their occurrence. Thus, this


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follows the consumption of materials, the work attendance of employees, the usage of

working time, the enforcement of orders and contracts regarding material supplies, products

marketing and machines/equipment usage. Stock recording is a necessary tool for the daily

activities of management in all economic units (workshops, departments and functional

services); at these places it serves to signal, identify and prevent (avoid) operational failures

of economic processes. The data provided by (or included in) stock recording can also serve

as a source of information for statistics and accounting.

As there are no unitary methodological standards for all patrimonial units, each

department (unit) that uses stock recording must design and implement it, tailored to specific

organizational needs.

In the specific literature, stock recording is also known as technical-operational

recording, as it uses technical means (counters, control clocks, ammeters, voltmeters, and so

on) to measure and automatically record data, and because it reflects the technological

processes used.

Statistics can be best understood as a two stage process. The first stage is to record

(following a uniform set of criteria) socioeconomic phenomena pertaining to mass groups.

The second stage consists of grouping together and summarizing the information comprised

in the aforementioned records, in order to obtain general indicators that will be used to offer

a holistic view of the phenomena that were analyzed.

The objective of statistics goes beyond patrimonial units as it includes demographic,

cultural and natural phenomena. In order to fully reflect empirical phenomena, statistics can

use, separately or together, all the standards/instruments of recording.

Statistics differ from other forms of economic evidence due to their specific means and

instruments used to collect, record and process information, and due to the way in which data

analysis is presented (tables, graphics, indicators, selective observations, censuses, surveys

and so on). Its objectives can be achieved in two ways:

1. By using specific means and instruments (surveys, censuses, monographs and so on) to

collect and record individual phenomena, after which the data is grouped and centralized in

order to obtain indicators that characterize, as a whole, the phenomena studied.

2. By using information provided by other forms of economic recording.

Accounting, as the main form of economic recording, has specific tasks and functions.

It records, monitors and controls, in a documented, complete and uninterrupted way, the

economic phenomena and processes that can be expressed as values.


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A particularity in the reflection of economic and financial operations that are subject to

registration makes reference to their documentation. Economic transactions are recorded and

registered using written documents. However, economic operations that cannot be expressed

using monetary standards are not subjects to accounting practices.

Using primarily monetary standards and sometimes, in addition, natural standards

(measures) in order to reflect economic operations, accounting is considered to be a numeric

evidence.

Although the three forms of economic recording distinguish each other by the methods

used for collecting, processing and presenting data, they also complement each other and

cannot be separated from each other, forming a unitary system of recording.

1.2. The tasks of accounting

Accounting has the following tasks:

1. To provide data and information required to develop the schedules of activity. At the

elaboration of the budget for the general activity of a patrimonial unit, accounting provides

data for: (1) sizing revenues and expenditures pertaining to financial and operating activities,

(2) forecasting the costs of activities and the gross operating surplus, (3) designing budgets

and cash flows in national and foreign currency, (4)

2. To chronologically record economic and financial operations, to analyze and maintain

data regarding the status of the patrimony. Such information are necessary both for the

internal use (needs) of the patrimonial unit and for external use, referring to the relations an

entity develops and maintains with external (public or private) actors.

3. To control patrimonial operations in order to ensure patrimonial integrity. Accounting

provides information regarding the existence and transfers of patrimony (or patrimonial

goods), its distribution within an economic entity and the persons that are accountable for its

safekeeping. In order to fulfill these tasks, accounting uses inventory (stock taking) and actual

(empiric) control of property.

4. To verify (control) the accuracy of accounting data in order to provide a real image of the

patrimony. The trial balance is used in order to fulfill this task.

5. To provide data and information necessary to oversee/track the judicious usage of

production factors, in order to ensure that the expenditures will be recovered from the income

and that economic activity will produce profits and increase economic efficiency.

6. To provide data and information necessary for the elaboration of synthesis documentswhich offer an accurate depiction of the patrimony, financial situations and economic results


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obtained. The information thus provided is required in order to substantiate decision making

processes.

1.3. Accounting functions

Accounting performs the following functions:

Recording function: refers to the ability to reflect rapidly and precisely complex

economic processes and phenomena that occur within patrimonial units and can be expressed

as numeric values.

Information function: as a result of accounting processes, information is obtained

regarding the structure and dynamics of the patrimony, the stages reached by economic

processes and phenomena and the results obtained at the end of a period of management.

Accounting presents exact information regarding the management of material goods and

money, the volume and dynamics of production, expenditures and revenues, results of

different activities and so on. Particular emphasis is given to periodic synthetic financial

statements which provide useful information (1) for the leadership and managerial needs of

the economic unit, (2) in relation with third persons and legal entities such as clients,

suppliers, banks and the state and (3) for economic and financial analyses. This function

results directly from the recording function of economic and financial operations by using the

same rules and principles, accounting being a tool that can be used for the knowledge of

reality.

The control function is linked with the informative function. This function refers the

use of accounting data to verify (control): storage and use of material values and money,

management of funds, achievement of forecasted indicators, terms of dept payment regarding

other entities or recovery of claims and the compliance with financial discipline.

Accounting data and economic records serve as evidence in court (justice) to prove the reality

of an operation, material responsibility, or the guilt/innocence of persons who participated in

such operations. The control function cannot be found in other forms of economic evidence.

Forecasting function. Accounting is not limited to the representation of the current

activities of an economic unit; its information represents an accurate and comprehensive

source for economic and financial analyses of activity and for the establishment of results.

Accounting provides the possibility to identify future trends and economic processes, thus

influencing decisions both for the present and future. Accounting data serve to develop the

budget for the general activity of the unit, budgets for specific activities and to fundamentprograms.


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Legal function. Using its instruments, accounting serves as a mean to provide evidence

of commercial and financial operations conducted and for the existence of patrimonial

elements. Thus, supporting documents, accounting registers and balance sheets are official

documents of the patrimonial units that serve as basic references in establishing responsibility

following financial and managerial control. Furthermore, for judicial institutions proceeding

cases, they constitute conclusive evidence in courts.

1.4. Accounting systems

The evolution of accounting is characterized by continuous developments of its

theoretical bases and by continuous improvements regarding practical usage and

implementation. During its history, different systems have been created and adopted in order

to represent the object of accounting and the organization of accounts.

Taking into consideration the object of accounting, the most known accounting system

are the simple entry bookkeeping and the double-entry bookkeeping.

Simple entry bookkeepingdraws its name from the fact that each and every economic

operation is only recorded once, in a single ledger account. For example, a sum of money

entering a banking account is only recorded in the ledger Current bank accounts.

Double entry-bookkeepingrepresents all economic operations by registering the same

transactions in two ledger accounts, one that shows the origin (source) of the transaction and

one that shows the destination.

Thus, if the amount of money that is transferred to the bank comes from the cashier, it

will be recorded (reflected) in two accounts: the House account to reflect the origin of

money and the Current bank accounts to highlight their destination.

Destination Origins

Current back accounts House

Taking into consideration the way in which accounts are organized in the economic

system, a differentiation should be made between accounting systems with a single circuit and

accounting systems with two circuits.

The single circuit accounting system (monistic)organizes accounts in a single flow in

the economic circuit (for example: supply exploitation - sales), both externally (for

operation that refer to relations with third parties) and internally (regarding internal

management).

Dual circuit accounting systems organize accounts in order to differentiate betweentwo distinct circuits: (1) one recording those elements and patrimonial operations related to


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exchanges and relations with third parties and financial results, and (2) another recording

operations pertaining to the internal management of the patrimonial unit, operations such as

production, costs, profitability of products, services and performed tasks. The two circuits

thus formed are called the financial (general) accounting circuit and the management

accounting circuit.

Financial (general) accounting is based on uniform rules and regulation regarding

organization and implementation, norms that are provided by law and are binding for all

patrimonial units. The objective of financial accounting is to record all the operations that can

affect the patrimony of the unit in order to determine possible financial results, offer

information required for internal or external (employees, customers, suppliers, banks and so

on) use; such accounting practices also involve de development and publication of financial

synthesis documents.

Management accountinghas as a principal aim to control the factors of production in

order to obtain goods (products), activities and services of high quality, with optimal costs. As

a result, such accounting processes are organized by each patrimonial unit in accordance with

their activities and empiric requirements. Its main objectives are to calculate production costs,

establish results and the profitability of the products that are obtained, to prepare (draft) the

revenues and expenditures budget by type of activities, to monitor and control budget

execution and to provide data necessary for decision making processes regarding the

management of patrimonial goods.

Dual circuit accounting is practiced mainly in European Union countries, while the

Anglo-Saxon and American socio-economic space prefers uses single circuit accounting.

2. THE OBJECT AND METHOD OF ACCOUNTING

2.1. The object of accounting

2.1.1. Theories regarding the object of accounting

Four main opinions have emerged in the specific literature regarding the object of

accounting, from multiple perspectives such as administrative, legal, economic and financial.

In the administrative visionthat belongs to the Italian school of thought (E. Pisani, G.

Massa, V. Gitti) the object of accounting is to control and reflect administrative actions in

order to obtain maximum economic effects with minimal efforts.

The legal visiondominated by the German school of thought (Fr. Hgli; R. Reisch, I.

C. Kreibig) and promoted in Romania by G. Trancu, S. Iacobescu and A. Sorescu considersthat the object of accounting is refers to the patrimony of a legal/private person, assessed from


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a legal perspective; thus patrimony is defined by pecuniary (material) legal rights and

obligations in relations to identifiable objects, goods or material values. From this perspective,

accounting is the science that records the patrimonial exchanges of an entity.

The economic visionis widely spread in the schools of thoughts of continental Europe

(J.Fr. Schr, R.P. Coffy, E. Leautey, A. Guibbault, A. Gilbert, I. Evian, C.Panu, D. Voina)

and considers that the object of accounting is the circulation of capital, in terms of destination

(fixed capital or circulating capital) or acquisition (equity or foreign capital).

The financial visionconsiders that the object of accounting is to study and improve the

existence, movement and transformation of patrimonial resources; the main topics are the

origins of such resources (permanent or temporary) and their utilization (sustainable or

cyclical). According to some authors the origins of resources can be structured considering the

obligationsthey entail (obligations towards the owners or towards third parties).

The financial vision is gaining more and more followers and is accepted by most

accounting schools. The economic and financial perspectives upon accounting are the bases

for developing conventions and international accounting standards.

We believe that the object of accounting is to reflect in numeric value the status of the

patrimony (property), its movement and transformation resulted from economic processes and

phenomena and the results obtained. From a patrimonial perspective, any economic unit (or

private institution) differs from another.

Property consists of all economic rights and obligations denominated in money,

together with goods to which they relate, of a natural or legal persons, wherever they

originate from (Epuran, Babaita, 1997, p. 34). For patrimony to exist, the following

conditions have to be jointly meet:

- The existence of the subject of property: an entity who assumes rights and obligations and

which can perform acts of disposition and administration upon the patrimony.

- The object of patrimonymust exist: material goods or money which form the object of the

aforementioned rights and obligations.

As such, patrimonial rights and obligationsand the material goodsto which they refer

are connected via the legal or natural entities that are subjects of property/patrimony.

From the perspective of their utility, the sum of goods that compose the patrimony

represents the property of different legal (companies or institutions) or natural (individuals)

entities. In economic language, the property of a patrimonial unit is expressed by the term

Assets.


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The patrimony or property of an entity is comprised from two main types of elements:

(1) patrimonial elements such as material and financial assets that can be expressed

quantitative or numeric and (2) patrimonial elements that refer to legal (judicial) pecuniary

relations established by entities during economic processes or phenomena, relationships

expressed by rights and obligations. From a structural point of view, the patrimony consists of

economic property and juridical property.

Economic property represents the sum of goods owned by a legal or private entity,

goods that can be used during economic activities, regardless of their source of provenience.

Legal or juridical property expresses legal relations, rights and obligations that are

created in economic units as a result of the existence and usage of economic property.

Legal pecuniary relations are important parts of the patrimony and consist of the

following categories of rights and obligations:

1. Rights of the subject of property:

- Property rights regarding the goods and values owned; and

- Rights of claims against third parties regarding goods and values transferred, assigned or

alienated.

2. Obligations (duties) for the subject of property:

- Internal obligations, toward partners or shareholders for their contribution of capital to the

patrimonial unit; and

- External obligations toward third parties for the goods and services received, for loans, labor

performed or taxes.

Reflecting the patrimony of an economic unit, the object of accounting is to maintain

accounting records, to compute and control the status, movement and transformation of

economic goods as a result economic processes and in conjunction with appropriate legal

relations.

Accounting can be organized according to specific rules in private companies

(organizations), public institutions, non-profit organizations and all other entities that possess

property.

Public institutionsare state organizations created with the aim of attaining socio-cultural

objectives and which are not engaged in productive economic activities. Such entities are

characterized by the fact that their revenues and expenditures are provided by state or local

budgets.


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Public institutions are tasked with administrative, socio-cultural or scientific (education,

health, research, culture) activities; as such activities do not generate income that would allow

self-financing they have to be funded from the budget.

The object of national (general) accounting of the state is to represent in a system of

accounts those operations that reflect national socio-economic activities, as circuits and flows;

national accounting also refers to macroeconomic data regarding on the evolution of national

economy.

National accounting also ensures coherent and consistent information required to make

decisions regarding economic policy, to substantiate macroeconomic forecasting or to inform

stakeholders on the development of national economy.

2.1.2. The elements that compose the object of accounting

The elements that compose the object of accounting are structured in three main categories:

- Economic goods;

- Economic processes; and

- Legal relations.

2.1.2.1. Economic goods

The sum of the goods used by an entity in its activity represents the patrimony of that

entity. The elements that compose the patrimony differ in accordance with the primary object

of activity: (1) in the case of credit banks, the primary element of wealth is money, (2) for

commercial units, the primary elements are the stocks of goods, (3) for industrial productive

units that transform raw materials into finished products, economic goods come in the form of

raw materials, auxiliary materials, machines, installations and finished products.

Beside wealth elements that are characteristics to the type of activity, every economic

unit also possesses economic goods that can be found in the patrimony of all economic units,

such as money, buildings, furniture, vehicles and so on.

Depending on the role meet during their exploitation, their circuit and rotation,

economic goods can be divided in non-current (fixed) assets and current assets.

2.1.2.1.1 Non-current (fixed) assets

Non-current assets distinguish themselves from other types of economic goods due to

their importance and by the fact that they are not fungible, they are supposed to serve in theactivities of patrimonial units for longer periods of time. Their recovery and transformation in


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money takes long periods of time. Depending on their nature, such goods can be classified as

intangible assets, tangible (material) assets and financial assets.

Non-current intangible assets do not take shape as material goods. This category

includes expenses incurred at the establishment or with the development of the patrimonial

unit (registration fees and expenses, the issuance and sale of shares and bonds, market

prospecting, marketing and advertising), research and development expenses (referring to the

purchase or creation of patents, licenses, trademarks, IT programs) and so on.

Non-current tangible (material) assets consist of existent (land, fixed assets) or

developing (investments in progress, current expenditures) goods that will result in the

increase or renewal of such assets.

Non-current financial assetsconsist of those items of property which represent amounts

invested for long or medium terms in the equity capital of other economic units, long term

loans; such investment aim to gain profit or other economic benefits.

An important role in obtaining material goods or performing services is played by non-

current tangible assets such as the fixed assets owned by a patrimonial unit.

Fixed assets are machineries of equipments used to transform or process materials

during the production process in order to produce goods, offer services and sell goods; fixed

elements (buildings, shops, transport means) that are used in order to secure normal

conditions for the process of production or marketing are also considered fixed assets.

In order to be considered fixed assets, the equipments and installations used in

economic processes have to simultaneously meet the following two criteria: to have a normal

life span greater than one year and an individual value greater than the limit set by the law.

Fixed assets have longer usage periods, taking part directly or indirectly to several

cycles of operation; during production or marketing processes they transfer their value

gradually to final products. As their utility value is depleted and when such goods are wearing

out, they need to be replaced before further economic activity can take place.

Fixed assets can be identified in the patrimony of economic units under multiple forms,

such as buildings (productive and unproductive), machinery and installations which produce

or transform energy (electric generators and motors, steam boilers), equipments and

machinery that act directly on raw materials and change their attributes (lathes or cutters),

measurement, control and regulation apparatus (ammeters, barometers, voltmeters), vehicles,

furniture, office equipment, safety equipment and so on.

Although various fixed assets can be grouped into categories and types, their evidence isnot kept by categories or types of fixed assets, as each fixed asset is different from others,


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even when they are similar, due to peculiarities such as building type, acquisition value,

degree of wear and tear, date of establishment, number of repairs, and so on. Therefore,

individual analytical records must be kept for each fixed asset.

Byfixed asset, as object of evidence, we understand the single object (or the complex of

objects) that, together with accessories and devices, can independently fulfill a distinct

functions. They are characterized by the fact that their construction is completed, the

component parts can be individualized, they can be used independently and they are

delimitated in space or they can be delimitated from other items in the evidence of the

patrimonial unit.

Once fixed assets are included in the accounting records, they can be subject to

economic operations regarding the establishment of their depreciation, repair or removal from

the management of patrimonial units.

2.1.2.1.2. Current assets

Current assets are used to ensure continuity of production and circulation and they are in

constant change and transformation in the economic circuit. Successively, they change their

form at each stage of the economic circuit (supply-production-sales). During the economic

circuit, current assets can be found simultaneously either in production or in circulation.

Depending on the form taken during different phases of the economic circuit, current

assets can be grouped in current material assets (stocks) and current financial assets

(cash/treasury).

Material current assets (stocks) are material in nature and include: stocks of raw

materials, fuel, spare parts, inventory, tools, devices, controllers, tires, work equipments,

uniforms, safety uniforms and equipment, finished products, packaging, natural goods and so

on. Accounting reflects economic operations regarding the entrance and exit of current

material assets from the storage units of patrimonial units.

Current financial assets (treasury).In the last phase of the economic circuit, current

material assets transform into financial assets, as they are received from customers following

economic transactions. Financial assets are represented by the money from the cashier of an

economic unit, existing cash and cash equivalents in bank accounts, checkbooks, bonds,

shares or other monetary values (postage and revenue stamps, travel tickets, tickets for

treatment and rest and so on). Accounting reflects those economic activities that generate

payments and cash receipts under any form (cash, bank transfers, check books and so on).


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Beside monitoring the existence, movement and transformation of goods, the object of

accounting also refers to the fact that it must determine and record the depreciation of the

utility values of goods, as a result of their exploitation or other factors. Economic goods

(current or non-current assets) are affected in time by devaluation factors (physical wear,

obsolescence or unfavorable market circumstances).In most cases, depreciation processes are

typical and work systematically, thus we can determine and foresee such phenomena in order

to recover these values (depreciation of fix assets, depreciation of inventory items).

Other loses in value are random and atypical as they occur only in certain circumstances

(the utility value of raw material can be reduced as a result of lower prices of goods or new

production processes). In these cases, in order to recover and take them into account, they are

estimated (as best as possible) and reserves are made in accordance with those estimates

(provisions are made).

2.1.2.2. Economic processes

The economic processes in which a patrimonial entity engages in order to achieve the

aims of activity is also a part of the object of accounting. Economic processes are specific

activities and operations carried out systematically in different phases of the economic circuit

and which generate quantitative modifications and transformations in the value and structure

of the patrimony. For each economic unit they generate both revenues and expenditures and

the difference between them determine the financial results of the entity at the end of each

year of activity (financial year).

Public accounting is an accrual accounting that requires patrimonial units to organize

and implement their accounting practices (and by extension their activity) in accordance with

the budget of revenues and expenditures that was approved.

Implementation of accrual accounting principles and of the International Public Sector

Accounting Standards requires all expenditures and revenues to be grouped according to the

nature of the activity in ordinary (operational) and extraordinary revenues and expenditures.

The costs incurred by public institutions are called government/budgetary spending

because they can be done only on the basis of the approved budged and are considered to be

maximum limits that cannot be exceeded.

The revenues of public institutions are recorded in accounting only in accordance with

documents that justify (offer evidence regarding) the existence of a transaction or other

economic event.


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Revenues and expenditures can be grouped by type of activity and in accordance with

International Accounting Standards as:

- Operational revenues and expenditures;

- Extraordinary revenues and expenditures; and

- Financial revenues and expenditures.

The financial result can be categorized as either deficit or surplus.

2.1.2.3. Legal relations

Legal relations that generate rights and obligations which can affect the patrimony of a

unit also constitute the object of accounting.

Rightsare legal-patrimonial relations that establish the legitimacy of a natural or legal

entity to own or use the goods and values that exist in its patrimony. Two categories of rights

can be identified in the patrimony of an (legal or natural) entity: property rightsand rights of

claim.

Property rights are those rights which confer to a person social recognition of the

ownership of goods and objects. Property rights define the patrimonial position of a person

vis--vis particular objects and material goods. In the structure of the patrimony, property

rights consist of all material assets (fixed assets, stocks) and funds that are not encumbered by

obligations toward third parties and for which the property owner (subject) has full and

unconditional capacity for usage and possession.

Legal rights of claim refer to the legally certified rights of one person to claim and

receive goods or values from third parties. These rights define the patrimonial position of a

person vis--vis another person, position that is gained by virtue of commercial and financial

relations (operations) or regulated by law.

Obligations (liabilities)are legal-patrimonial relations that express legal or contractual

commitments of an entity to other entities; such commitments refer to goods or values that

exist in the patrimony. Obligations can be considered the source of origin for

patrimonial/property rights.

2.2. The method of accounting

The term of method is of Greek origins and derives from meta, (which means

"succession, change, after which") and hodos, (translated as "way") and can be understood as

"the path which must be taken to reach a particular outcome, purpose or truth ".


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"The method shows a systematic way of research, knowledge and transformation of the

objective reality" (DEX, p. 626).

The method is a rational (logical) system of research which can be used to establish the

principles, procedures and instruments that will be used for the study of an object or

phenomena. The object and the method of a science are interdependent and condition each

other: the object shows what must be studied and the method shows how it should be studied.

To achieve its object of study accounting has its own method of research based on

certain laws, principles and specific procedures.

2.2.1. The principles of the accounting method

The fundamental principles of accounting are:

- The principle of dual representation or the equality of the balance sheet;

- The principle of double recording of patrimonial operations;

- The principle of periodic synthesis calculations;and

- The principle of enclosed patrimony.

The principle of dual representationpostulates that all patrimonial assets should be

reflected under two aspects:

1. In terms of the utility of goods or their destination (allocation) in the activity of an

economic entity (non-current assets, current assets, financial or monetary assets). The notion

of actives is used in this case.

2. In terms of the property relations by which economic goods are acquired (become objects

of rights and obligations); this refers to the acquisition or provenience of assets and the notion

of source or passive is used in this context.

In accounting, the same component of the patrimony, viewed as a whole, is reflected

and represented in a dual aspect. Dual representation of property can be rendered in a

synthetic form, as the following equation:

Value of economic goods = Value of provenience sources - relationship known as the

dual representation equation. The dual representation of patrimony is effectively implemented

with the help of the balance sheet that expresses the status of the patrimony at a certain point

in time.

The principle of double recording of patrimonial operations. The elements that

constitute property are in continuous movement and transformation during the stages of an

economic circuit. Thus, new elements may enter the patrimony, existent elements may leavethe patrimony or goods (sources of goods) may transform during the economic circuit. The


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principle of double recording takes into account the fact that every economic operation

generates a ratio of equivalence between goods and sources, between inputs and outputs.

In essence, the principle of double recording maintains that, using the same sum, all

changes in the volume and structure of economic goods (or sources of provenience) should be

recorded, while respecting the equality criteria required by the principle of dual

representation. Double recording is influenced by dual representation as, during their

movements and transformations, all economic goods are analyzed from the dual perspective

of utility, namely regarding their economic destination and source of provenience. Dual

representation and double recording, as essential features of the accounting method, are

specific to it and cannot be found in any other economic discipline.

The principle of periodic synthetic calculations. In order to know the economic and

financial results, the performance of an economic unit at the end of a financial (fiscal) year,

periodic synthesis calculations are necessary; these can be made using trial balances, balance

sheets, annexes to the balance sheet, patrimonial result and execution accounts.

The principle of enclosed patrimony. Each economic unit has the obligation to

organize and implement the accounting process. While carrying out their activities, economic

units establish contacts with other patrimonial units, but economic operations are to be

reflected for each economic unit, only from its perspective.

For example, the payment of fixed assets is reflected in both the accounts of the payer

(buyer) and in the beneficiary (seller), respecting the principle of double recording:

A. Payer: subtracts the cash (money) and the obligations toward the seller.

B. Seller: adds the cash (money) and deducts the right of claims toward the buyer.

If this principle would not be respected, the transaction would assume the following

form:

A. Payer: subtracts the cash.

B. Seller: adds the cash.

Such a form would make it impossible to differentiate at microeconomic level the

patrimony and the results of each entity.

2.2.2. Procedures used in the accounting method

The theoretical fundamental principles of accounting are implemented in the socio-

economic practice; thus the method of accounting refers both to the way in which research


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and study are done and toprocedures and instrumentsutilized in order to study the objects of

accounting.

The process of accounting refers to the means used to achieve a particular result, the

way to proceed, means, method, procedure" (D.E.X., p. 853). Thus, the process shows how, in

which way, we can proceed to an end and the instruments (tools) are the practical ways in

which work can be performed for a particular procedure.

In order to accomplish its objects of research, accounting can use either specific

procedures (balance sheets, accounts, trial balances) or procedures that are common to other

economic subjects.

The balance sheet is a procedure of the accounting method which reflects the

patrimony (as a whole) and financial results of different activities at a given moment. It

ensures the implementation of the dual representation principle by presenting, at a particular

time and in monetary terms, the patrimony; the destinations of economic goods as well as

their sources are presented.

The data presented in the balance sheet can be further detailed and analyzed in annexes

to the balance sheets and income statements. Since de balance sheet does not present

information regarding the movements, transformations and changes that occur in the structure

of economic goods or their sources due to financial and economic operations and processes,

accounting uses accounts.

For each item, source, economic process or phase of an economic process a new

account must be opened; these accounts record what exists, what increases or what decreases

form that economic (patrimonial) element. Although accounts differ regarding their economic

content, they condition each other and together they constitute the aggregate accounts system

used by accounting to achieve its object of study. Accounts are used to ensure that the

principle of dual representation is implemented, while maintaining equality in the balance

sheet. If the balance sheet provides general information regarding the patrimony at a given

time, accounts provide detailed information regarding the existence and movement of goods,

sources or economic processes; while the balance sheet offers only a general overview of

economic data, accounts can particularize and offer details on the patrimony.

The gap between accounts (which offer detail information) and balance sheets (that

present a general perspective) is bridged by another accounting procedure the trial balance.

Given the equalities it contains, the trial balance offers the opportunity to verify the

correctness of entries made in accounts, while respecting the principle of dual registration.


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The trial balance centralizes information that is reflected separately in the accounts (by

economic goods or processes) in order to obtain a general perspective on the activity of the

patrimonial unit. By centralizing data via the trial balance, information regarding present and

previously cumulated changes in the structure of the patrimony is provided.

In addition to the aforementioned specific procedures, accounting also uses procedures

that are common to other economic disciplines, such as documents, evaluation, calculation

and inventory.

In accounting, no economic operation can be registered without a document, a written

record that can justify the economic operation. Documents are particularly important in order

to check the accuracy and legality of economic operations, control material goods or money,

or to establish accountability for the patrimonial management of that unit.

Since the object of accounting includes all elements that have value (numerical)

expressions, all assets, sources and economic processes need to be expressed in monetary

terms, a fact that can only by achieved by using another procedure of accounting, namely

evaluation (assessment).

Evaluationinvolves converting natural units (economic goods) into units of value, with

the help of prices and tariffs, in order to bring all the elements of patrimony to a common

denominator. As a procedure of the accounting method, evaluation is intertwined with other

procedures and contributes to their application.

Evaluation is closely related to the calculation procedure because recording the

existence and movement of patrimony cannot be done without determining their exact value.

Differences can occur between what is recorded in accounting and what exists in reality

due to natural occurring losses during storage, errors, omissions, the poor condition of

measurement instruments or unlawful acts committed by managers. In order to limit de effects

of such acts and disparities, the inventory is used; the inventory establishes elements of

property that exist empirically and correlates them with data existing in accounting.


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3. DOCUMENTATION A PROCEDURE OF THE ACCOUNTING METHOD.

3.1. The importance and editing of documents

Accounting is characterized by the fact that it fundaments and justifies all of its data

using written documents, which record all economic transaction (when they occur). Economic

transactions can be recorded in accounts only when they are justified by written documents;

no economic transaction can be registered or recorded without such proper justification.

Documents and papers must be prepared for all economic transactions that change the

economic resources of a patrimonial unit and in order to prove or offer justification for the

existence of economic means, their sources and economic processes, employment and activity

of personnel, workload and remuneration.

Documents are written papers prepared during economic operations in order to prove

the existence of these operations. They can also be generated by the existence of patrimonial

goods and in order to exercise the organizational and administrative functions of a

patrimonial unit.

Depending on their content and destination, documents have different functions within

patrimonial units. We can distinguish between documents that record economic and financial

operations and serve as bases for accounting recording, cumulative documents (documents

which serve in the preparation of other documents that can constitute a basis for accounting

recording) and documents that have no relations with accounting, but serve for administrative

purposes. From these categories, only those documents that serve directly or indirectly as

sources for accounting records are documents of evidence.

Evidence documents represent the primary stage of reflection for all economic

operations. Therefore, all documents used to record economic operations at the time of their

occurrence, are called primary documents. The importance of documents as tools of the

documenting procedure results from the following considerations:

- Through documents, accounting can reflect the entire activity of economic units: the

existence, movement and transformation of economic goods, their sources, the entire

economic circuit and final results of economic activities;

- Since documents are sources of data, they act as organic links between al forms of economic

evidence;

- They serve as support for managerial accountability. Documents are used to determine the

persons who were entrusted with the safekeeping and usage of economic goods and to

determine (asses) their managerial results;


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- Documents serve as a basis for managerial auditing: finding deficiencies, illegal spending,

uneconomical use of economic goods, financial indiscipline and unlawful deductions;

- They are a mean for the governing bodies to obtain data required for the management of the

unit; and

- Documents have legal importance because they determine relationships between units and

determine compliance with contractual discipline. In case of disputes, fraud or unlawful

managerial practices they serve as bases for judiciary inquiry. Thus accounting books, balance

sheets and other justification papers serve as official accounting documents which can be used

as evidence in court in order to asses patrimonial operations.

Documents serve as proof for all economic operations that take place within and

economic entity and to determine the material accountability (liability) of those who manage

the economic goods of patrimonial entities. Primary documents have general applicability in

all accounting procedures; they constitute the basis of accounting recordings and directly

influence the accuracy of accounting data and the timeliness of information gathering.

A document is valid only if it meets thefollowing criteria (conditions):

- is written clear and legible, to eliminate any possibility of subjective interpretation;

- does not contain erasures or correction;

- is completed in due time;

- has all of its empty lines canceled;

- contains accurate, exact and real data; and

- cash values (in the case of justification documents) are written twice, in numbers and letters.

If mistakes are done during the drafting stage of a document, they need to be rectifiedin

all of the copies of that document by crossing out the wrong text (amount) so that the wrong

data is still readable; corrections will be made above the old data. The corrected document

must mention the rectification (confirmed by the signature of the persons who signed the

original document), and the exact time when it was made (to establish an order in time and to

ensure that the persons who signed/drafted the document are aware of ulterior changes). If a

document that records handover operations of material values is modified, the persons who

take over and hand over must confirm by signature. Cash and bank documents (checks, bills,

payment and collection orders) cannot be rectified; they must be cancelled without being

detached (from the checkbook).

If errors are identified in documents, the errors must be presented to the people who

drafted the documents and to anyone else who has a legitimate interest in the economicoperation recorded by that document.


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The accuracy of their content, their clear, timely and complete drafting present special

importance for all economic documents, since they determine the reality and accuracy of all

accounting data, ensure that all accounting procedures and documents are updated and

contribute to the management of patrimonial units. The concordance between economic

operations and their respective documents is an essential task of accounting.

3.2. Content and classification of documents

In order to offer a clear and accurate reflection of economic operations, all documents

should contain the following elements:

- Name of the document (invoice, receipt);

- Header (name and address of the unit/organization which prepared the document or the

location where it was drafted);

- Date when the document was drafted and its serial number;

- The parties that were involved in the economic transaction recorded in the documents;

- The content of the financial-economic operation and its justification;

- Standards expressing the object of the operation (quantity, value); and

- Signatures of the persons responsible for the legality and reality of the operation recorded by

the document.

In the case of transfer of economic goods, the documents which record the economic

transactions must be signed by the person who received the good, the person who delivered

the good and by the person that ordered the release.

Beside the common elements that need to be included in all documents, specific

elements have to be included in accordance with the nature of the economic operation

recorded by the document. Thus, the bill that records sales operations must also include

specific elements as: information on the order and contract under which materials are sent,

shipping data, the customers and suppliers bank accounts, the means of transport and

payment, and the person in charge of the transfer.

3.3. Standardization and verification of documents

Standardization involves the development of uniform documents for economic

operation within an industry or branch of the economy. The elements that ought to be

contained by every document, their size, shape, purpose, circuit are also established.


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Standardization offers a series of advantages:

- ensures a unitary system of evidence (recording), offering the opportunity to centralize and

process data in an automatic way;

- creates unitary primary documents that can be simultaneously used by accounting, statistics

and operational recording;

- helps to reduce printing costs;

- eases filling operations (once the knowledge is obtained, it can be transferred between

economic units);

- reduces the number of documents by eliminating unnecessary documents and duplication;

and

- simplifies the content of documents and improves (streamlines) their circuit, thus leading to

simplification and streamlining in all accounting procedures and activities.

Depending in their use, standardized forms can be divided into common financial and

accounting forms (developed by the Ministry of Finance) and specific forms (developed by

ministries, departments, business groups, professional associations or patrimonial units

according to their needs). The models of accounting registers and most standardized forms are

provided in the List of common standardized forms of financial - accounting activity (OMF

nr. 3512/2008). If computer equipments are used to develop documents or to process and

record data in accounting, records and standardized forms can be adapted to the requirements

of the patrimonial unit, while respecting the models presented in the aforementioned list.

Rationalization and standardization of documentsshould ensure that:

- Documents contain information that is strictly necessary to the departments that use them;

- Data is obtained with a maximum of efficiency;

- Provide information needed by the management;

- Reduce the workload required to complete the paperwork; and

- Meet the requirements for automatic data processing;

Before being registered, every document must be subject to verification in order to

discover material errors, illegal or improper activities; thus the accuracy of accounting data is

ensured. Documents are verified (checked)under three aspects:

- Formal verification;

- Background (content) verification; and

- Numbers (digits) verification.

Formal verifications checks if the document was prepared correctly. Elements ofinterest are:


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- Use of the appropriate document in order to record an economic operation (by the nature of

that operation);

- If all required information is included;

- If all the elements that describe the economic operation are specified;

- If the document is corroborated with its justificatory annexes; and

- If it contains all required signatures and there are no erasures or corrections that are not

certified.

Numbers (digits) verification refers to the arithmetical accuracy of the calculations

included in the document.

Background (content) verification follows the reality, necessity, appropriateness and

legality of the economic operation recorded in the document.

Reality of the operationchecks if the economic operation took place at the date, place

and in the conditions reflected in the document (for example, if the amount paid for the

purchase of materials is consistent with the quantity of the materials received).

The necessity verificationchecks if the operation recorded in the document is useful for

the activity of the patrimonial unit and if that operation is economically justifiable. For

example, the purchase of materials can be necessary for future economic activities, but if the

purchase is made too son it can be inappropriate as it immobilizes more funds in stocks than it

would be necessary.

Background (content) verification also checks the legality of economic operations; only

those operations that are not contrary to the law can be considered legal.

The control of operations recorded in accounting documents can be performed by

persons in charge with accounting activities, persons that perform preventive financial control

or financial control, by other persons delegated for such tasks and by state control bodies. In

order to establish responsibility for the verification of documents, each document must

present the name of the person who performed verification activities and his signature (the

person who verifies a document must differ from those who drafted the document). After

documents are verified, they can be prepared in order to be recorded in accounting.

3.4. The circulation of documents

The circulation (circuit) of documents describes their trajectory from the moment they

are drafted (enter the patrimonial unit) until the moment they are send to the archive. The

circulation must be organized in such a way that all documents entering the unit at a particular


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time can be verified and registered in the shortest time; a well established circuit and

procedure influences the accuracy and timelines of accounting.

Each department and workplace must know what type of documents they have to

prepare, to whom they most submit them and the deadlines for submission.

Every document must circulate in a certain order and without unnecessary delays, so

that they offer the necessary information to decision-making bodies. For an economic

operation a single document will be prepared, with a well established circuit, in a number of

copies necessary to various compartments, in order to ease work and reduce operational costs.

The trajectory of documents within an economic unit differs from patrimonial unit to

patrimonial unit, depending on:

- Organizational structure;

- The economic content of the operations reflected by the document;

- The organization of accounting; and

- The methods, procedures and accounting practices used.

The circulation of documents must uphold the following requirements:

- Documents must follow the shortest path and encounter as few tiers as possible while

continuity of movement is preserved. Documents that have entered the economic unit are to

be recorded at the registry and then distributed to operating units for resolution.

- Documents must be settled completely before the deadline specified in the document flow

chart. The document flow chart contains: document name, the compartment that should

prepare it, document verification, the tiers through which it circulates, the activities that must

be done at each stage of the execution and execution deadlines.

The document circulation graph must be approved by the management of the

patrimonial entity and processed by all employees.

In terms of scope and content, document graphs are:

- individual graphics that include operations and accounting activities performed by each

employee, execution schedules and the departments or persons to whom they must be sent;

- structural graphs that are prepared at departmental level; and

- synthetic graphs that include all the necessary operations to prepare complex paperwork

(such as the balance sheet).

3.5. Filing and maintenance of documents

After the complete and final settlement of documents, they enter the final stage of thecircuit, they are classified.


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Classification means that documents are arranged in a strictly determined order,

ensuring proper storage and easy retrieval in case they are requested. The precision and

accuracy of this process determine how easy/fast documents can be found in the archive of the

unit.

Classification (grouping, clustering) of documents is governed by special requirements

which provide criteria for the ranking of documents that enter/leave the patrimonial unit. In

order to find documents more easily, a list that contains the documents classified in each file

can be prepared.

A rational and efficient document classification must meet the following requirements:

- To offer the possibility to easily find any document;

- To be simple enough to be understood and applied by anyone;

- To be elastic (to be utilized for a larger number of documents once the unit develops); and

- To be suitable for the specific requirements of the documents produced by the economic

unit.

Depending on the length of time and place of storage, classification can be temporaryor

final (permanent).

Temporary (provisionary) classification includes documents settled in the functional

services and sectors of the unit and which are stored in the current archive. The accounting

service temporary classifies accounting documents, the cashier and other house documents.

Final classification is done at the general archive when documents received in their

complete form and settled.

Documents can be classified in dossiers (files/folder) according to several criteria: the

object, nominal, correspondents, geography, alphabetically, chronologically and so on.

Classification by object means that documents are grouped by categories of

problems/issues, thus ensuring that in the same dossier are included similar documents (for

example, in a file are classified only documents regarding supplies, employment or wages).

Nominal classificationgroups in the same folder all the documents that have the same

destination (bills, minutes).

The correspondence criterionrequires that all documents that constitute correspondence

with other economic units or institutions be grouped in the same folder. The disadvantage of

this type of classification is that it groups in the same file documents of different importance

and periods of storage.

The geographical criteriongroups documents by localities (country, county, city) andwithin the same geographical area by correspondents.


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The alphabetical criteriameans that in the same folder documents are classifies in the

alphabetical order of their name.

Chronological classification means that documents are grouped in the same order as

they are drafted. Whatever other type of classification is used, in every folder documents are

arranged in a chronological order.

Thestorage of documents must ensure their full integrity, because they serve to control

the economic operations that have been performed (their accuracy and correctness) and in

order to offer information on the activity of the economic unit.

The archives of the institution store all documentary materials: original documents,

copies, photocopies, films, correspondence, drawings, plans and so on. Over the year, these

materials are stored in the current archive, organized along the main functional services.

House documents and some accounting documents (balance sheets, trial balance, account

records) are kept in special rooms or safes maintained (under the responsibility) of the chief

accountant.

Due to the development of electronic equipment for processing accounting data, beside

the classical classification and archive storage, documents and accounting records can be

organized, classified and kept in other information carries such as CDs, external memories

and USB memories; these new environments ensure easier identification of data and higher

security against alienation or theft.

Documentary materials, consisting of the complete papers (works) of services and

departments, namely those from the current archive, are to be transferred to the general

archive by the end of the current year for the previous year, on a date established by

management. The transfer of the current archive to the general archive is done on the basis of

a transfer list; the list needs to be signed by the head of the archive and needs to state the

number of each delivered dossier. A copy of the list is given to the service that handed in the

documents and another list is kept in the archive.

Documents can be temporarily removed from the archive only on the basis of a report

and with managerial approval; the report indicates who required the documents, the person

who approved the release of the document and with what purpose. The following documents

have to replace the document released from the archive: certified copy of the document, the

report, approval that the document can be released and a proof signed by the person who took

the original document.

The periods for which documents must be kept in the archive are established by law anddiffer according to the nature and importance of the documents. Thus accounting books and


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documents that constitute the basis for accounting records must be kept for 10 years while

payrolls and the balance sheet must be kept for 50 years (Accounting Law number 82/1991,

art. 25). Documents of historical, scientific or political interest, as well as documents that

must be kept for longer periods of time can be transferred for safekeeping to the state archive,

if the patrimonial unit cannot maintain them anymore. All other documents can be transferred

from the archive of the unit to be disposed off, once the mandatory storage period ends.

3.6. Document restoring

In case of loss, destruction or theft, documents can be restored in 30 days from the date

when their disappearance was acknowledged, using a special recovery file. The recovery file

includes:

- A written notification drafted in 24 hours from the time the loss/theft/destruction was

observed. The notification can be drafted by someone from the management of the

patrimonial entity of by the person who observes/acknowledges the disappearance of the

document;

- If the loss/theft/destruction of the documents or records constitutes a felony, judicial bodies

must be informed;

- Minute (report) that acknowledges the loss/theft/destruction must be written by the head of

the unit in three days from the moment the act was acknowledged. The report contains

identification data of the missing document, the full name of the employee responsible for

safekeeping the document, the date and circumstances when the disappearance of the

document was observed. The report will be signed by the head of the economic unit, the chief

accountant, the employee responsible for the safekeeping of the act and by his hierarchic

superior;

- A written statement given by the employee responsible for the safeguarding of the

document; the statement will show the circumstances under which the document has

disappeared;

- Proof that the guilty person was sanctioned disciplinary of that legal actions have started

against him;

- A written instruction issued by the head of the economic unit to reconstitute the document;

- The document reconstituted as a copy.

If the document originates from another economic unit, the document will be restored

by that unit, at the written request of the institution the needs it.


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Restored documents and records must bear the word reconstituted written in a visible

way and mention the number and date of the provision on which the reconstitution was made.

Acts that establish general expenditures (vouchers, tickets) that were lost or stolen

before being recorded in accounting cannot be reconstituted; the guilty persons must support

the damage that was caused by their actions/inaction. Subsequent finding of the original

document which was reconstituted does not cancel disciplinary or criminal sanctions. In this

case the reconstituted document is canceled based the minute/report.

The person that is found guilty for the loss/destruction/theft of the original document

can be hold materially accountable for the damages caused or for the expenses incurred by the

patrimonial unit in the process of restoration and search.

Unit managers are responsible for the evidence of all document restoration and for

maintaining the recovery files.

4. THE BALANCE SHEET AND THE ACCOUNT

SPECIFIC PROCEDURES OF ACCOUNTING

4.1. The balance sheet

4.1.1. Defining the balance sheet

According to the principle of dual representation, the property of economic units must

be reflected in accounting under two aspects:

1. In terms of the utility of goods or their destination (allocation), for which the notion active

property (actives) is used; and

2. In terms of the property relations by which economic goods are acquired (become objects

of rights and obligations), using the notion of passive property (passives).

The need for dual representation derives from the fact that patrimonial units are required

to take into account not only the assets or economic goods that they own, but also the property

relations or the sources of those economic goods.

Since the establishment of an organization, the sources that represent the initial

allocation are equal to the assets acquired with them. This equality is possible because both

goods and sources refer to the same patrimonial objects but from different perspectives: their

composition and mode of acquisition.

This principle is embodied in accounting via the procedure called balance sheet. The

balance sheet is a process if the accounting method which reflects the principle of dual

representation of the property. In its simpler forms, the balance sheet can be represented asbalance with two horizontal arms. The two arms are called ACTIVE(left arm; represents the


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concrete uses of economic goods) and PASSIVE (right arm; represents the

resource/source/origins of economic goods). The names of active and passive are based on the

characteristics of economic goods and on their source of origin.

Considering that between the uses and sources of economic goods there is perfect

equality, the same equality will be maintained between the active and the passive of the

balance sheet.

Economic goods as well as their sources are diverse, thus they have to be generalized

and synthesized in order to obtain knowledge of the overall situation of an economic unit.

Generalization is achieved by taking data from accounting (in a centralized way in order to

calculate financial indicators) and presenting it in the balance sheet. Generalization in the

balance is achieved in stages, from large to small, resulting in three levels:

- 1st level is called the Group and gathers patrimonial elements by general criteria:

(circulatory assets group, non-circulatory assets group, equity group, and so on);

- 2ndlevel is called Chapterand structures the Groups by analytic criteria; and

-3rd level is called Item and defines or represents patrimonial elements as single economic

goods or sources.

From a financial point of view, the balance shows if and to what measure the entity is

capable (due to the assets is owns) to honor (pay) its debts to third parties when they mature.

As such, the active is considered a set of goods necessary to pay debts (liabilities) at

their maturity (as such, the active is viewed in terms of liquidity capacity). Passive is treated

through the terms on which debts (liabilities) must be paid, when payment becomes due.

Liquidity defines the ability of assets (economic goods) to be converted in time into

cash. Different types of assets can be transformed into cash in different amounts of time. As

such, liquidity is higher for tangible assets than it is for financial assets; it is lower for

circulatory assets than it s for non-circulatory ones.

Following the liquidity criterion, patrimonial elements can be ordered in the balance

sheet in two ways:

- In order of increasing equity: from assets whose transformation requires longer periods of

time to assets whose transformation requires shorter periods of time;

-In order of decreasing liquidity: from assets that can be turned into money in short time to

assets that can be turned into money in longer periods of time.

Due payment expresses the time (date) when a particular debt must be paid. Not all

debts of a patrimonial unit have the same payment deadlines. Some debts have longerpayments terms (such as long and medium term bank loans) while other debts (current


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liabilities) have very short deadlines (usually they include debts to suppliers, creditors, staff,

the state and so on). Debts or liabilities can be ordered in the balance sheet in the following

ways:

- In increasing order: from debts that are not due for payment during the lifetime of the

economic units, to those that have to be paid in longer period of time and those that have to be

paid in the immediate future;

-In decreasing order: opposed to the order above (from current liabilities to debts that dont

have to be paid during the existence of the economic unit).

Increasing liquidity and dept payment, as criteria to elaborate the balance sheet are

specific to the continental (European) accounting system, to which Romania is also aligned.

According to this vision, the patrimony is primarily formed by stable goods and resources

which are intended for sustainable use and which are not necessarily required to have liquidity

or to be due for payment at a certain time. The stable goods are joined by economic assets and

resources which have liquidity or due payment in the immediate future.

Decreasing liquidity and debt paymentare used as criteria to elaborate the balance sheet

in the Anglo-Saxon accounting system. In this perspective, current liquidity and liability take

precedent over distant ones.

4.1.2. The influence of economic operations on the balance sheet

The balance sheet presents the situation of the patrimony at a given moment in time. As

such, any economic transaction taking place in a patrimonial unit will determine changes in

the structure or size of the balance sheet, maintaining the principle of equality (between active

and passive). Actives and passives are represented in the balance sheet as items, reflecting the

patrimonial elements they represent.

Patrimonial elements do not have a static character, as they are subject to modifications

caused by economic operations. According to the changes they produce on the balance sheet,

economic operations can be systematized in four categories, all of which respect both the

principle of dual representations and the permanent equality between the active and passive of

the balance sheet. The four categories are:

1. Economic operations that determine the increase of an active item while reducing another

active item with the same amount (P1).

2. Economic operations that determine the increase of a passive item while reducing another

passive item with the same amount (P2).


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3. Economic operations that determine the increase of an active item while also increasing a

passive item with the same amount (M1).

4. Economic operations that determine the decrease of an active item while decreasing an

passive item with the same amount (M2).

4.1.3. Case study number 1:

The influence of economic operations on the balance sheet

The patrimonial unit presented the following synthetic balance sheet on the 31st of

December 2011 .

Table 1

Balance sheet

31stDecember 2011

Active Passive

Item name Amount Item name Amount

Assets

Clients

House

Bank accounts

10.000

5.000

500

4.500

Social Capital

Suppliers

Short term loans

15.000

2.000

3.000

Total Active 20.000 Total Passive 20.000

In January 2012 the following operations take place:

Operation 1: 1.000 lei are transferred in a bank account from the client S.C. Clientul

S.R.L.

As a result of this operation, the following changes occur: the sum available in the bank

account increases with 1000 (from 4500 to 5500), the patrimonial units right to collect from

its customers diminishes with 1000 (from 5000 to 4000). As a result, two active balance sheet

items change with the same amount: Bank accounts increases with 1000 and Clients decreases

with 1000 (Table 2).


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Table 2

Balance sheet

After operation number 1

Active Passive


Assets

Clients

(5.000 1.000)

House

Bank accounts

(4.500 + 1.000)

10.000

4000

500

5.500

Social Capital

Suppliers

Short term loans

15.000

2.000

3.000


Note that operation 1 produced changes only in the active of the balance sheet, by

increasing and decreasing two active items with the same amount; total active remained

unchanged and equal to total passive. If we use A for active, P for passive, ai and pi for

balance sheet items and for the size of the modification, we can represent this modification

as: A + a4- a2= P , meaning that,

20.000 + 1.000 1.000 = 20.000

The type I formula for balance sheet modification (P1) is:

A + ai- ai= P (F1)

where: i =1,n

Operation 2.

The provider SC Provider SRL is paid the sum of 1500 from a short term credit granted

by a bank.

This operation produces the following changes: the debt to the supplier is reduced with

1500 (from 2000 to 500) and increases the companys liability to the bank with 1500 (from

3000 to 4500). Therefore, two items form the passive of the balance sheet with change:

Suppliers decreases with 1500 and Short term bank loans increases with the same amount

(Table 3).


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Table 3

Balance sheet


Active Passive


Assets

Clients

House

Bank accounts

10.000

4000

500

5.500

Social Capital

Suppliers

(2000-1500)

Short term loans

(3000+1500)

15.000

500

4500


Note that operation 2 produced changes only in the passive of the balance sheet, by

increasing one and decreasing another with the same amount, the total remaining unchanged

and equal with the total active. Using the same notations as before, we obtain the formula:

A = P - p2+ p3, meaning

20.000 = 20.000 1.500 + 1.500

Type II formula for the modification of the balance sheet (P2) is:

A = P - pi+ pi where i =1,n (F2)

Operation 3

An asset of 10 000 value is bought from a supplier.

This operation produces the following changes: increases the value of company assets

with 10000 (from 10000 to 20000) and increases the companys obligations to suppliers with

the same amount (form 500 to 10500). As a result, two balance sheet items will change: the

active Assets and the passive Suppliers will increase with the same amount (Table 4).


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Table 4

Balance sheet


Active Passive


Assets

(10000+10000)

Clients

House

Bank accounts

20.000

4000

500

5.500

Social Capital

Suppliers

(500+10000)

Short term loans

15.000

10500

4500


Note that this operation produced changes both in the size and structure of economic

goods from the Active and Passive. Items form both the Active and the Passive increased with

10000 as well as their totals (from 20000 to 30000). This type of change can be represented

as:

A + a1= P + p2, meaning

20.000 + 10.000 = 20.000 + 10.000

Type III formula of balance sheet modification (M1) is:

A + ai= P + pi where i =1,n (F3)

Operation 4

From a bank account 5000 are paid to suppliers, using a payment order.

This operation produces the following changes: reduces what is available to the firm in

the bank account with 5000 (from 5500 to 500) and reduces obligations to suppliers with the

same amount (from 10500 to 5500). As a result, two balance sheet items, Bank accounts and

Suppliers, located on the two sides of the balance, will be reduced with the same amount

(Table 5).


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Table 5

Balance sheet


Active Passive


Assets

Clients

House

Bank accounts

(5500-5000)

20.000

4000

500

500

Social Capital

Suppliers

(10500-5000)

Short term loans

15.000

5500

4500


Note that this operation produced changes both in the structure and in the size of

patrimonial elements from Active and Passive. Financial assets (Bank accounts) decreased

with 5000; Passive (Suppliers) also decreased with 5000 and the total balance also decreased

with the same amount (while maintaining equality between Active and Passive). This can be

represented as:

A - a4= P - p2, meaning

30.000 5.000 = 30.000 5.000

Type IV formula for the modification of the balance sheet (M2) is:

A - ai= P - pi where i =1,n (F4)

Although the economic operations from the previous case studies were simple

operations that only modified two items in the balance sheet, most economic operations

generate more complex changes in the balance account; even so, any complex operation can

be decomposed into several simple operations covered by the above reasoning.

Depending on how the changes affect the balance sheet, all economic operations can be

grouped in two categories:

A) If economic operations only change items from one part of the balance sheet (Active

or Passive), the total of the balance sheet remains unchanged. Because the value of the

economic operation is only moved from one item to another (form one patrimonial element to


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another) without modifying the total of the balance sheet, these operations are called

Permutative or Structural (P1 and P1 mentioned above).

B) If economic operations modify items from both parts of the balance sheet (Active

and Passive), the total of the balance sheet also changes with the same amount. Because

modifications take place (Active, Passive and their respective totals) such operations are

called Modifi