3.1 Elements of financial statements COPY Flashcards
At the end of this chapter, you should be able to: 1. Define assets, liabilities, equity, profit, income and expenses. 2. Give examples of assets, liabilities, income and expenses. 3. Classify accounts according to assets, liabilities, equity, income and expenses. 4. State the accounting equation and calculate the values of assets, liabilities and equity using the accounting equation. 5. Analyse the effects of business transactions on the accounting equation.
How many elements of accounting are used to represent the financial effects of business transactions? What are they?
Five. They are:
- Assets
- Liabilities
- Equity
- Income
- Expenses
What are ‘assets’? Which financial report are assets recorded / found in?
Assets are resources usually owned or controlled by the business to carry out its business activities.
or
Assets are resources / items of value owned by (i.e. belonging to) a business.
or
Assets: Things of value owned by a business entity.
or
Assets are the things that a company owns, that can be sold to pay debts.
All assets are recorded / found in the Balance Sheet.
What are assets expected to do?
Generate future benefits.
Give examples of non-current assets (i.e. capital expenditures).
Habit of Mind: Striving For Accuracy
To Memorise:
Non-Current Assets (i.e. Capital Expenditures) refer to:
1. Land
2. Property (comprises land and building)
3. Office Equipment (comprises computers, printers, machines and other equipment)
4. Fixtures and fittings (comprises furniture, shelves and lighting)
5. Motor vehicles (comprises trucks, vans, cars and motor cycles)
6. Plant and equipment (only plant machinery and plant equipment)
Give examples of current assets.
Habit of Mind: Striving for Accuracy
To Memorise:
- Inventory (goods held for resale)
- Trade receivables (amounts owed by debtors to whom the business sells goods and services on credit)
- Other receivables (amounts owed by debtors for reasons other than the sale of goods and services on credit)
- Income receivables (income earned that is not collected by the business yet)
- Prepaid expenses (expenses paid by the business before they are incurred)
- Cash at bank (money deposited with the bank)
- Cash in hand (physical cash held on hand)
Define ‘Goods’.
‘Goods’ is the general term for things that the business is buying and selling, as part of its main business activity.
Define ‘Receivable’.
A ‘receivable’ means an amount owed to the business. The people who owe money to the business are called debtors.
Defne ‘owe’.
Dictionary Definition: HAVE DEBTS. To need to pay or give something to someone because they have lent money to you, or in exchange for something they have done for you.
E.g. We still owe $1000 on our car = We still need to pay $1000 before we own our car.
Define ‘own’.
Dictionary Definition: BELONGING. Belonging to or done by a particular person or thing; or to have something that legally belongs to you: We own our house.
Is it important that the correct asset is recorded?
Yes. Whether an item is an inventory or not will depend on what the business is selling and buying.
A furniture business owns a delivery truck. Should the furniture business record the delivery truck as as a non-current asset (i.e. capital expenditure and / or under motor vehicles) or as a current asset (under inventory, i.e. goods for resale)?
As a non-current asset. As the furniture business uses the delivery truck to transport goods to customers, the delivery truck should be recorded as an asset (non-current) called motor vehicle in the Balance Sheet; or
The delivery truck has been bought for use by the business and is not purchased for resale purposes. As such, it should be classified as a non-current asset.
A used vehicle (i.e. second hand vehicle) business owns a delivery truck. Should the used vehicle business record the delivery truck as as a non-current asset (i.e. capital expenditure and / or under motor vehicles) or as a current asset (under inventory, i.e. goods for resale)?
Depends:
If the delivery truck is used to transport goods and other materials (i.e. purchased for use by the business), it should be recorded as a non-current asset called motor vehicle in the Balance Sheet.
If the used vehicle business will be selling the delivery truck just as it sells other used vehicles (i.e. the delivery truck is bought for resale purposes), the delivery truck should be recorded in the Balance Sheet as a current asset called Inventory.
What are ‘liabilities’? Which financial report are liabilities recorded / found in?
Liabilities are amounts that the business owes to other businesses or people.
All liabilities are recorded / found in the Balance Sheet.
Give examples of non-current liabilities (i.e. Capital Receipts).
HOM: Striving for Accuracy
To memorise accurately:
- Mortgage loan
- Long Term Borrowings
What is a ‘mortgage loan’?
Money borrowed to be repaid over more than a year, and an asset is used as collateral.
What is ‘collateral’?
Dictionary meaning: valuable property owned by someone who wants to borrow money which they agree will become the property of the company or person who lends the money if the debt is not paid back.
What is a ‘long-term borrowing’?
Money borrowed to be repaid over more than a year.
Give examples of current liabilities.
HOM: Striving for Accuracy
To memorise accurately:
- Current portion of Long Term Borrowing
- Short term borrowings (e.g. bank overdraft)
- Trade payables
- Other Payables / Accrued Expense / Expenses Payable
- Income received in advance
What are ‘trade payables’?
Trade payables are amounts owed to creditors (i.e. people to whom money is owed) by the business for buying goods and services on credit. It is a current liability recorded in the Balance Sheet.
What are ‘other payables’?
Amounts owed to creditors for reasons other than buying goods and services on credit. It is a current liability recorded in the Balance Sheet.
