Chapter 2 2021

2 The Elements of
Financial Statements
Learning Objectives
1 Describe the five financial statements
2 State the accounting equation, and define its components.
Analyze the effects of business transactions on the accounting

3 equation.
1-1
LEARNING
OBJECTIVE 1 Describe the five financial statements.
 The definition of the financial statement
 The objective of financial reporting
 The five financial statements
1-2
The definition of the financial statement
 Financial statement (or financial report) is a formal

record of the financial activities and position of an entity.
Financial statements are the outcome of summarizing
process of accounting.
1-3
The objective of financial reporting
Objective of general-purpose financial reporting is:
To provide financial information about the reporting entity

that is useful to present and potential equity investors,
lenders, and other creditors in making decisions about
providing resources to the entity.
1-4
The five financial statements
Entities prepare five financial statements :
Income
Owner’s Balance Statement Notes to
Statement
Equity Sheet/ of Cash Financial
P/L and
Statement SOFP Flows Statement
OCI
1-5
The Five Financial Statements
 An income statement or statement of comprehensive

income, statement of revenue &
expense, P&L or profit and loss report, reports on an
entity’s income, expenses, and profits over a period of
time. A profit and loss statement provides information on
the operation of the enterprise. These include sales and
the various expenses incurred during the stated period.
1-6
 A Statement of changes in equity or equity

statement or statement of retained earnings, reports
on the changes in equity of the company during the
stated period.
 A balance sheet or statement of financial position,

reports on a company's assets, liabilities, and owners
equity at a given point in time.
1-7

1-8
 A cash flow statement reports on a company's cash flow

activities, particularly its
operating, investing and financing activities.
 Footnotes to the financial statements

and management discussion and analysis. The notes
typically describe each item on the balance sheet,
income statement and cash flow statement in further
detail
1-9

1-10
1-11
LEARNING State the accounting equation, and define

2
OBJECTIVE its components.
Owner's
Assets = Liabilities +
Equity
Basic Accounting Equation

 Provides the underlying framework for recording and
summarizing economic events.
 Assets are claimed by either creditors or owners.
 If a business is liquidated, claims of creditors must be paid

before ownership claims.
1-12 LO 3
Owner's
Equity
Assets: An asset is an economic resource controlled

by an entity as a result of past events and from which
future economic benefits are expected to flow to the
entity.
1-13 LO 3
The criteria for recognition of asset
 The item has a cost or value that can be measured

with reliability.
 It is probable that any future economic benefit
associated with the item will flow to the entity;
 Resources controlled by the entity;
 A result of past events or transactions.
1-14
Future economic benefit embodied in an asset is the

potential to contribute, directly or indirectly, to the flow of
cash and cash equivalents to the entity.
The future economic benefit embodied in an asset may
flow to the entity in a number of ways:
a. Used singly or in combination with other assets in the
production of goods or services to be sold by the entity.
b. Used to settle a liability
c. Distributed to the owners of the entity.
1-15
The criteria for recognition
Asset Economic Benefit
Used for the production of goods for sale to

Machine
customer.
Office Provides space to employees for administering
Building company affairs.
Used in the transportation of company products and
Vehicle
also for commuting.
Inventory Cash is generated from the sale of inventory.
Cash Cash!
Receivables Will eventually result in inflow of cash
1-16
An asset is a resource controlled by the entity,

we mean the entity has the ability to obtain
economic benefits from the asset, or restrict
others from getting economic benefits from
the asset.
1-17
Assets classification
Cash
Land Receivable
Notes
Buildings Assets Receivable
Prepaid
Equipment
Accounts
Supplies
1-18
 Current assets: assets are held for only a short

time.
 E.g. Debtors, Bills receivable, Stock(Inventory), Cash and
Bank balances, etc
1-19
 Non-current assets: assets are held and used in

operations for a long time. An office building is occupied
by administrative staff for years. Similarly, a machine has
a productive life of many years before it wears out.
 E.g. Land, Building, Machinery, Plant, Furniture and

Fixtures, etc.
1-20
Cash on hand
Cash in Banks
Trade receivables
Internal receivables
Current assets
Advances
Raw materials
Finished goods
Assets
Merchandise goods,…
Tangible fixed assets
Finance lease assets
Non-current assets Intangible fixed assets

Investment in joint ventures and
associate
1-21 Prepaid expenses,..
What are your assets?

 Bank Account & Money in your pocket
 Car
 Clothes
 Books
 Stocks/Bonds/CD’s
 Prepaid rent
 Computers & Electronic Equip.
 Knowledge????
 Abilities????
1-22
Owner's
Equity
Liabilities: A liability is a present economic 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.
1-23 LO 3
The criteria for recognition of liability

with reliability.
 It is probable that any future economic benefit
associated with the item will flow out from the entity
(to transfer economic benefits, to settle of a present
obligation );

Eg: Accounts Payable, Notes Payable, Salaries and Wages
Payable, etc.
1-24
The criteria for recognition of liability
 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 ways, for example, by:
 Payment of cash;
 Transfer of other assets;
 Provision of services;
 Replacement of that obligation with another obligation;
 Conversion of the obligation to equity.
1-25
2 - 26
Liabilities classification
Notes
Payable
Payable
Liabilities
Accrued Unearned
Liabilities Revenue
 Current Liabilities: Liabilities that are required to be paid

within one year from the end of the reporting period are
classified as current liabilities.
 E.g. Current liabilities include accounts payable, notes

payable due within a year, short-term borrowings, salaries
payable, insurance payable, income taxes payable,
unearned revenues and current maturities of long-term
debt.
1-27
 Non-current Liabilities: Noncurrent liabilities include notes

payable due after one year, long-term borrowing and bonds
payable. Notes payable due after a year are classified as
noncurrent liabilities while notes payable due within a year
are classified as current assets.
 E.g: Long-term bonds, notes payables, long

term leases, pension obligations, and long-term
product warranties.
1-28
Short term trade
payables
Taxes payables
Current
Liabilities
Payables to
employees
Internal
payables,…
Liabilities
Long-term bonds,
Notes payables
Non-current
Liabilities:
Long term leases,
Long-term
product warranties,
…
1-29
What are your liabilities?

 School Loan
 Car Loan
 Credit Card Balance
 The Lover's Kiss
1-30
Owner's
Equity
Owner's Equity: Equity is the residual interest in the

assets of the entity after deducting all its liabilities.
 Ownership claim on total assets.
 Referred to as residual equity.

 Investment by owners and revenues (+)
 Drawings and expenses (-).
1-31 LO 3
Owner’s Equity Illustration 1-6

Expanded accounting
equation
Increases in Owner’s Equity

 Investments by owner are the assets the owner puts into the
business.
 Revenues result from business activities entered into for the
purpose of earning income.
► Common sources of revenue are: sales, fees, services,
commissions, interest, dividends, royalties, and rent.
1-32 LO 3
Owner’s Equity Illustration 1-6
Expanded accounting
equation
Decreases in Owner’s Equity

 Drawings An owner may withdraw cash or other assets for
personal use.
 Expenses are the cost of assets consumed or services used in
the process of earning revenue.
► Common expenses are: salaries expense, rent expense,

utilities expense, tax expense, etc.
1-33 LO 3
Equity Classification
Owner’s Owner’s
Capital Withdrawals
Equity
Revenues Expenses
1-34
Equity Classification
Owner’s equity (Working

capital)
Investment by
owners
Other capital
Investment and development

fund
Additional capital
Equity from retained Other equity funds
earning
Undistributed profit after tax
Revaluation differences on
asset
Other equity
Foreign exchange differences
1-35
Income
 Income is increases in economic benefits during the

accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to
contributions from equity participants.
1-36 LO 3
Income
Ex: Sold merchandise to Lux Corp. for 4.200. The

merchandise had cost 3.000.
1-37 LO 3
The criteria for income recognition

with reliability.

- Under the cash basis, income recognized when cash
is received.
- Under the accrual basis, entities recognize income
when they perform services or products (rather
than when they receive cash).
 Increases in equity:
1-38
Income classification
 There are two types of income:

 Revenue: Income earned in the ordinary course of
business activities of the entity;
 Gains: Income that does not arise from the core
operations of the entity.
1-39 LO 3
Income classification
Revenue from sales
Revenue
Financial income
Income:
Gains Other Income
1-40 LO 3
Expense
 Expense is decreases in economic benefits during the
accounting period in the form of outflows or
depletions of assets or incurrences of liabilities that
result in decreases in equity, other than those
relating to distributions to equity participants.
1-41
The criteria for expense recognition

with reliability.
 Decreases in equity

- Under the cash basis, expenses recognized when cash is paid.
- Under the accrual basis, expenses are recognized when
incurred (rather than when paid).
1-42
Examples of Expenses
• Salaries and wages

• Utility expenses
• Cost of goods sold
• Administration expenses
• Finance costs
• Depreciation
• Impairment losses
1-43 LO 3
Expenses classification
 There are two types of expenses:

 Expense is used up in earning revenues in a
company’s main operations. In other words it is a
cost with a matching economic benefit during a
particular period. Example of it includes expenses
such as advertising, rent raw material cost etc….
 As far as loss is concerned it is the outflow of
funds or cash which arises not due to business
transactions but due to some other events. For
example loss due to lawsuit or due to fire in the
building in case it is not insured.
1-44 LO 3
Expenses classification
Cost of goods sold
Selling expenses
Expenses
General administration
expenses
Expenses
Financial expenses
Losses Other Expenses
1-45 LO 3
Net income
 Net income (also called net profit, total

comprehensive income, net earnings, net profit,
informally, bottom line) is a calculation that measures
the amount of total revenues that exceed total
expenses. It other words, it shows how much revenues
are left over after all expenses have been paid. This is
the amount of money that the company can save for a
rainy day, use to pay off debt, invest in new projects, or
distribute to shareholders.
1-46 LO 3
How to calculate net income?
 Calculate net income from the income statement
Net income= Total income (Revenues)- Total expenses
 Calculate net income from the balance sheet

Total equity at the end of period =
= Total equity at the beginning of period

+ Investment by owners
- Drawings
+ Revenues
Net income
- Expenses
1-47 LO 3
How to calculate net income?
 Calculate net income from the balance statement
Net income =
= Total equity at the end of period
- Total equity at the beginning of period
- Investment by owners
+ Drawings
NOTE: From TA= TL+ TE
To TE= TA- TL
1-48
DO IT! 3 Owner's Equity Effects
Classify the following items as investment by owner, owner’s

drawings, revenue, or expenses. Then indicate whether each
item increases or decreases owner’s equity.
Classification Effect on Equity
1. Rent Expense Expense Decrease
2. Service Revenue Revenue Increase
3. Drawings Drawings Decrease
4. Salaries and Wages

Expense Decrease
Expense
1-49 LO 3
LEARNING Analyze the effects of business transactions

3
OBJECTIVE on the accounting equation.
Transactions are a business’s economic events recorded

by accountants.
 May be external or internal.
 Not all activities represent transactions.
 Each transaction has a dual effect on the accounting

equation.
1-50 LO 4
Transaction Analysis
Illustration: Are the following events recorded in the accounting

records?
Illustration 1-7
Discuss product
Purchase
Event design with Pay rent
computer
potential customer
Criterion Is the financial position (assets, liabilities, or

owner’s equity) of the company changed?
Record/
Don’t Record
1-51 LO 4
A transaction may do one of several things:
 It may increase both the asset side and the

liabilities and owners' equity side.
 It may decrease both the asset side and the

liabilities and owners' equity side.
1-52
A transaction may do one of several things:
 It may cause both an increase and a decrease on

the asset side.
 It may cause both an increase and a decrease on

the liabilities and owners' equity side.
Regardless of what transaction occurs, the accounting equation must be in
balance after the transaction is analyzed
1-53
TRANSACTION 1. INVESTMENT BY OWNER Ray Neal decides to start

a smartphone app development company which he names Softbyte. On
September 1, 2017, he invests $15,000 cash in the business. This
transaction results in an equal increase in assets and owner’s equity.
Assets = Liabilities + Owner's Equity

Trans- Accounts Accounts Owner's Owner's
Cash + + Supplies + Equipment = + - + Rev. - Exp.
action Receivable Payable Capital Drawings
1. +15,000 +15,000
Illustration 1-8
Tabular summary of
Softbyte transactions
1-54 LO 4
TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte
Inc. purchases computer equipment for $7,000 cash.
Illustration 1-8

Cash + + Supplies + Equipment = + - Drawings + Rev. - Exp.
action Receivable Payable Capital
1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
1-55 LO 4
TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte Inc.

purchases for $1,600 headsets and other accessories expected to last
several months. The supplier allows Softbyte to pay this bill in October.
Illustration 1-8 Assets = Liabilities + Owner's Equity
1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
1-56 LO 4
TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte Inc.
receives $1,200 cash from customers for app development services it has
performed. Illustration 1-8

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
1-57 LO 4
TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte

Inc. receives a bill for $250 from the Daily News for advertising on its
online website but postpones payment until a later date. Illustration 1-8

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
1-58 LO 4
TRANSACTION 6. SERVICES PERFORMED FOR CASH AND CREDIT.
Softbyte performs $3,500 of services. The company receives cash of
$1,500 from customers, and it bills the balance of $2,000 on account.
1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
1-59 LO 4
TRANSACTION 7. PAYMENT OF EXPENSES Softbyte Inc. pays the

following expenses in cash for September: office rent $600, salaries and
wages of employees $900, and utilities $200. Illustration 1-8

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
1-60 LO 4
TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte Inc.
pays its $250 Daily News bill in cash. The company previously (in
Transaction 5) recorded the bill as an increase in Accounts Payable.
1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
1-61 LO 4
TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte Inc.

receives $600 in cash from customers who had been billed for services
(in Transaction 6). Illustration 1-8

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $4,700 - $1,950 - $1,300
1-62 LO 4
TRANSACTION 10. WITHDRAWAL OF CASH BY OWNER Ray Neal
withdraws $1,300 in cash in cash from the business for his personal use.
Illustration 1-8
Trans- Accounts Accounts Owner's
Cash + + Supplies + Equipment = + Owner's - + Rev. - Exp.
1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050 + $1,400 + $1,600 + $7,000 = $1,600 + $15,000 + $1,300 - $4,700 - $1,950
1-63 $18,050 $18,050 LO 4
Net income is needed to determine the

Financial Statements ending balance in owner’s equity.
SOFTBYTE
Income Statement
For the Month Ended September 30, 2017
Illustration
Financial statements and
their interrelationships
SOFTBYTE
Owner’s Equity Statement
1-64 LO 5
SOFTBYTE
Illustration 1-9
The ending
balance in SOFTBYTE
owner’s equity Balance Sheet
is needed in September 30, 2017
preparing the
balance sheet.
Illustration 1-9
Financial statements
and their
interrelationships
1-65
SOFTBYTE
Financial Balance Sheet
September 30, 2017
Statements
Balance sheet and

income statement
are needed to
prepare statement of
cash flows.
SOFTBYTE
Statement of Cash Flows
Illustration
Financial statements
and their
interrelationships
1-66
Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
1-67
Income Statement
 Reports the revenues and expenses for a specific

period of time.
 Lists revenues first, followed by expenses.
 Shows net income (or net loss).

 Does not include
investment and
withdrawal transactions
between the owner and
the business in
measuring net income.
1-68 LO 5
 Reports the changes in owner’s equity for a specific

period of time.
 The time period is the same as that covered by the

income statement.
1-69 LO 5
Balance Sheet
 Reports the assets, liabilities, and owner's equity at a

specific date.
 Lists assets at the top, followed by liabilities and owner’s

equity.
 Total assets must equal total liabilities and owner's

equity.
 Is a snapshot of the company’s financial condition at a

specific moment in time (usually the month-end or year-
end).
1-70 LO 5
Statement of Cash Flows
 Information on the cash receipts and payments for a

specific period of time.
 Answers the following:

► Where did cash come from?
► What was cash used for?
► What was the change in the

cash balance?
1-71 LO 5
Question
Which of the following financial statements is prepared as
of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.
1-72 LO 5
Summary of Transactions
1. Each transaction is analyzed in terms of its effect on:

a. The three components of the basic accounting
equation.
b. Specific of items within each component.
2. The two sides of the equation must always be equal.
1-73 LO 4
DO IT! 1 Tabular Analysis
Transactions made by Virmari & Co., a public accounting firm, for the
month of August are shown below. Prepare a tabular analysis which
shows the effects of these transactions on the expanded accounting
equation, similar to that shown in Illustration 1-8.
1. The owner invested $25,000 cash in the business.
2. The company purchased $7,000 of office equipment on credit.
3. The company received $8,000 cash in exchange for services
performed.
4. The company paid $850 for this month’s rent.
5. The owner withdrew $1,000 cash for personal use.
1-74 LO 4
1. The owner invested $25,000 cash in the business.

Trans- Accounts Owner's Owner's
Cash + Equipment = + + + Rev. - Exp.
action Payable Capital Drawings
1. +25,000 +25,000
2. +7,000 +7,000
3. +8,000 +8,000
4. -850 -850
5. -1,000 -1,000
$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000
$18,050 $18,050
1-75 LO 4
2. The company purchased $7,000 of office equipment on credit.

1. +25,000 +25,000
2. +7,000 +7,000
3. +8,000 +8,000
4. -850 -850
5. -1,000 -1,000
$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000
$18,050 $18,050
1-76 LO 4
3. The company received $8,000 cash in exchange for services

performed.
1. +25,000 +25,000
2. +7,000 +7,000
3. +8,000 +8,000
4. -850 -850
5. -1,000 -1,000
$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000
$18,050 $18,050
1-77 LO 4
4. The company paid $850 for this month’s rent.

1. +25,000 +25,000
2. +7,000 +7,000
3. +8,000 +8,000
4. -850 -850
5. -1,000 -1,000
$31,150 + $7,000 = $7,000 + $25,000 + $8,000 - $850 - $1,000
$18,050 $18,050
1-78 LO 4
5. The owner withdrew $1,000 cash for personal use.

1. +25,000 +25,000
2. +7,000 +7,000
3. +8,000 +8,000
4. -850 -850
5. -1,000 -1,000
$31,150 + $7,000 = $7,000 + $25,000 + $1,000 + $8,000 - $850
$38,150 $38,150
1-79 LO 4
DO IT! 2 Financial Statement Items
Presented below is selected information related to Flanagan Company

at December 31, 2017. Flanagan reports financial information monthly.
Equipment $10,000 Utilities Expense $ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Owner’s Drawings 5,000
(a) Determine the total assets of at December 31, 2017.
(b) Determine the net income reported for December 2017.
(c) Determine the owner’s equity at December 31, 2017.
1-80 LO 5

(a) Determine the total assets of at December 31, 2017.
The total assets are $27,000, comprised of

• Cash $8,000,
• Accounts Receivable $9,000, and
• Equipment $10,000.
1-81 LO 5

(b) Determine the net income reported for December 2017.
1-82 LO 5

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2 The Elements of

1 Describe the five financial statements

2 State the accounting equation, and define its components.

Analyze the effects of business transactions on the accounting

 The definition of the financial statement

 The objective of financial reporting

 The five financial statements

 Financial statement (or financial report) is a formal

The objective of financial reporting

Objective of general-purpose financial reporting is:

To provide financial information about the reporting entity

Entities prepare five financial statements :

The Five Financial Statements

 An income statement or statement of comprehensive

 A Statement of changes in equity or equity

 A balance sheet or statement of financial position,

The Five Financial Statements

 An income statement or statement of comprehensive

 A cash flow statement reports on a company's cash flow

 Footnotes to the financial statements

The Five Financial Statements

 An income statement or statement of comprehensive

LEARNING State the accounting equation, and define

Basic Accounting Equation

 Assets are claimed by either creditors or owners.

 If a business is liquidated, claims of creditors must be paid

Assets: An asset is an economic resource controlled

The criteria for recognition of asset

 The item has a cost or value that can be measured

Future economic benefit embodied in an asset is the

The criteria for recognition

Asset Economic Benefit

Used for the production of goods for sale to

Inventory Cash is generated from the sale of inventory.

Receivables Will eventually result in inflow of cash

An asset is a resource controlled by the entity,

 Current assets: assets are held for only a short

 Non-current assets: assets are held and used in

 E.g. Land, Building, Machinery, Plant, Furniture and

Tangible fixed assets

Finance lease assets

Non-current assets Intangible fixed assets

What are your assets?

Liabilities: A liability is a present economic obligation of the

The criteria for recognition of liability

 The item has a cost or value that can be measured

 A result of past events or transactions.

 The settlement of a present obligation usually involves

 Transfer of other assets;

 Replacement of that obligation with another obligation;

 Conversion of the obligation to equity.

 Current Liabilities: Liabilities that are required to be paid

 E.g. Current liabilities include accounts payable, notes

 Non-current Liabilities: Noncurrent liabilities include notes

 E.g: Long-term bonds, notes payables, long

What are your liabilities?

Owner's Equity: Equity is the residual interest in the

 Referred to as residual equity.

Owner’s Equity Illustration 1-6

Increases in Owner’s Equity

Decreases in Owner’s Equity

► Common expenses are: salaries expense, rent expense,

Owner’s equity (Working

Investment and development