Lecture 2-3 (The accounting equation) Flashcards
ASSET
A resource that is controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
Examples of assets.
Land and buildings owned by a business.
Raw materials owned by the business.
Receivables.
When is something recognised as an asset (recorded in balance sheet)?
Only if:
- It is probable that the future economic benefits associated with the item will flow to the entity.
- and the item has a cost or value that can be measured with reliability.
LIABILITY
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
When is something recognised as a liability?
Only if:
- It is probable that any future economic benefit associated with the item will flow from the entity.
- and the item has a cost or value that can be measured with reliability.
Examples of liabilities.
Bank borrowing
Taxation payable
Trade payables
CONTINGENT LIABILITIES
Liabilities that do not meet the recognition criteria may still be disclosed in the notes to the account.
OWNERSHIP INTEREST/EQUITY
Equity is the residual interest in the assets of the entity after deducting all its liabilities.
NET ASSETS
is used as a shorter way of saying total assets less total liabilities.
What causes changes in equity?
- Owners putting more money into the business.
- Owners withdrawing money.
- Profits or losses being generated.
REVENUE
Increase in ownership interest. (increase in net assets). Usually recorded in income statement.
EXPENSES
Decrease in ownership interest (decrease in net assets). Recorded in income statement.
SoFP ACCOUNTING EQUATION
Assets - Liabilities = Ownership Interest
Income statement ACCOUNTING EQUATION
Revenue - Expenses = Profit/Loss
DUALITY OF TRANSACTIONS
Every transaction has 2 aspects- an inflow and an outflow. Debit and credit.
