Chapter 3 - The Measurement Of Wealth Flashcards
- Understand the importance of the separation of the business from the owner and the application of the business entity principle. - Understand what a statement of financial position is and understand its component parts. - Understand the importance and limitations of the statement of financial position. - Have an understanding of the accounting equation and be able to draw up a simple statement of financial position. - Be aware of the advantages and thinking behind different formats for the
Key Concept: The statement of financial position or balance sheet
The statement of financial position is a statement which shows at a point in time, known as the reporting date, all the items (assets) owned by the enterprise and all the amounts owed by the enterprise (liabilities).
Key Concept: The business entity principle
The business entity principle states that transactions. assets and liabilities that relate to the enterprise are accounted for separately from the assets of the owner or owners. It applies to all types of enterprise irrespective of the fact that the enterprise may not be recognized as a separate legal or taxable entity.
Key Concept: Liquidity
Liquidity refers to the ease with which assets can be converted to cash in the normal course of business.
Key Concept: International Accounting Standards - definition of an asset
An asset is a resource controlled by an enterprise as a result of past events from which future economic benefits are expected to flow to the entity.
Definition: Current assets
The Standards (IAS/IFRS) define a current asset as meeting any of four criteria namely:
- It is expected to be realized in, or is intended for sale or consumption in, the entities’ normal operating cycle.
- It is held primarily for the purpose of being traded.
- It is expected to be realized within twelve months after the reporting date.
- It is cash or cash equivalent.
–> A current asset is one which is either part of the operating cycle of the enterprise or is likely to be realized in the form of cash within one year.
Definition: Non-current assets
Anything that does not fall within the category of current asset. It encompasses two distinct types of asset known as tangible and intangible assets, in addition to other assets of a long-term nature.
Definition: Tangible, financial and intangible assets
Tangible asset (often also fixed asset): One that can be touched Financial asset: A financial investment which may be in the form of a holding of shares in another business entity, an investment in debentures or such like. Intangible asset: One that has no physical form but still meets the essential definition of an asset in that it provides future benefits, examples being the copyright on a book, patents and trademarks.
Key Concept: Fixed asset
An asset that is acquired for the purposes of use within the business and is likely to be used by the business for a considerable period of time.
Key Concept: A liability
- A present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
- Liabilities are what the business owes.
Key Concept: Current liabilities
Those liabilities falling due for payment with one year
Key Concept: Owners’ equity
Owners’ equity is in one sense a claim on the assets of the enterprise. It is different from other liabilities in that the amount cannot necessarily be determined accurately. It can be viewed as a residual claim on the assets of the enterprise after all the other monies owed, the amounts of which are generally known, have been paid off.
Key Concept: The principle of duality
The principle of duality is the basis of the double-entry bookkeeping system on which accounting is based. It states: every transaction has two opposite and equal sides.
