Professional Research

(a) An asset is a resource controlled by the entity as a result of past events and from which

future economic benefits are expected to flow to the entity. (Conceptual Framework,

para. 4.4 (a))

The future economic benefits embodied in an asset may flow to the entity in a number of

ways. For example, an asset may be:

1. used singly or in combination with other assets in the production of goods or services

to be sold by the entity;

2. exchanged for other assets;

3. used to settle a liability; or

4. distributed to the owners of the entity. (Conceptual Framework, para. 4.10)

(b) A liability is 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. (Conceptual Framework, para. 4.4 (b))

The settlement of a present obligation usually involves the entity giving up resources

embodying economic benefits in order to satisfy the claim of the other party. Settlement

of a present obligation may occur in a number of ways, for example, by:

1. payment of cash;

2. transfer of other assets;

3. provision of services;

4. replacement of that obligation with another obligation; or

5. conversion of the obligation to equity.

 An obligation may also be extinguished by other means, such as a creditor waiving or

forfeiting its rights. (Conceptual Framework, para. 4.17)

(c) Under the accrual basis of accounting, revenues are reported on the income statement

when they are earned not necessarily when the cash is received. Under the accrual

basis of accounting, expenses are matched with the related revenues and/or are

reported when the expense occurs, not when the cash is paid.

It is illustrated with the use of adjusting entries. These adjusting entries enable the items

in the financial statements to be presented in their appropriate amounts. Expense is

being recognized with the amount that was actually incurred in the period as much as

revenue is also recognized with the amount that was actually earned.