The Accounting Elements

Question 1

Define Assets

Answer 1

An asset is a resource controlled by the entity. Assets are a result of past transactions or events. Assets provide a future economic benefit. Examples include: Cash, Inventory, Accounts Receivables, GST paid, Prepayments, Investments in Shares, Land and buildings.

Question 2

Define Liabiliites

Answer 2

Liabilities result in a future economic sacrifice. Liabilities are owed to an external party. Liabilities are current debts and obligations. Some examples include: bank overdraft, accounts payable, accrued expenses, GST collected, Loans, Mortgages.

Question 3

Define Owners Equity

Answer 3

Owner’s equity is residual interest in the assets of the entity, after deducting all its liabilities. Owner’s equity represents the owner’s claim on the net assets of the entity. Examples include: revenues, capital contributions, expenses and drawings.

Question 4

Define Revenue

Answer 4

Revenue is the value of transactions with the customers or clients of the business. Revenue is the amount earned from the sale of a good or service. Examples include: sales revenue, fee income from providing services, interest revenue and commissions.

Question 5

Define Expenses

Answer 5

Expenses are costs incurred in running the business in order to earn income. Expenses are the value of goods consumed. Expenses are the value of services “used up”. Examples include: Cost of Goods Sold, Depreciation, Interest, Rent and Utilities.

Question 6

Define Recognition

Answer 6

Recognition is the process of incorporating items in the statement of financial position (balance sheet) if it meets the definition of an element. In addition to meeting the definitional criteria of an element, an item must meet recognition criteria:
• Probability – benefit will be received or sacrifice made)
• Reliable measurement