Professional Documents
Culture Documents
Accounting is important in every business because of the relevant information it can provide to
its owners. A business is an organization where owners contribute capital with the goal of
generating profit. The Accounting Standard Council defines accounting as a service activity
with the function of providing quantitative information, primarily financial in nature, about
economic entities, that is intended to be useful in making economic decision.
When we say LIQUIDITY, it means that we are trying to measure the ability of the business to
pay its current obligation when they fall due. This has something to do with having enough
money and other assets that can be turned into cash when there is a need to pay their debts or
obligation upon maturity.
When we say SOLVENCY, it means that we are trying to measure the ability of the business to
have available cash over a longer period of time to meet other obligations when they fall due in
the future. This has something to do with having enough money and other assets to be converted
into cash in the near future to pay long term obligations or debts.
Assets are the resources owned by a business. These are their present economic resources,
which are controlled by the business because of past events. An economic resource is a right
that has the potential to produce economic benefits (Revised Conceptual Framework for
Financial Reporting, 2018). Assets presented on the Statement of Financial Position is
composed of the Current Assets and the Non-Current Assets.
Current Assets. The International Accounting Standard (IAS) defines Current Assets as assets
that are:
1. Expected to be realized in the entity's normal operating cycle (no longer that 1 year)
2. Held primarily for the purpose of trading.
3. Expected to be realized within 12 months after the reporting period.
4. Cash and Cash equivalents (unless restricted).
Here are the line items of the current assets that are presented in the Statement of Financial
Position:
Financial Assets Held for Trading are also known as trading securities, which are either
adebt or equity securities that were purchased by the business with the intention to sell them in
the near future to generate cash (Robles & Empleo, 2016; Valix et al, 2017; Valix et al, 2019;
Warren et al, 2017).
Trade Receivable includes Accounts Receivables and Notes Receivables (current portion)
that are claims arising from sale of merchandise or service in the ordinary course of business.
The difference between an Accounts Receivable and a Notes Receivables is that a
Notes Receivable is always supported by a promissory note while the Accounts Receivable is
not (Robles & Empleo, 2016; Valix et al, 2017; Valix et al, 2019; Warren et al, 2017).
Inventory or Merchandise Inventory (PAS No. 2) are assets which are (a) held for sale in
the ordinary course of business; (b) in the process of production in such sale; and (c) in the form
of materials or supplies to be consumed in the production process or in the rendering of
services. Examples of which are: Raw Materials; In-process Goods; Finished Goods; and
Merchandise Inventory.
Prepaid Expenses are expenses you or your business paid in advance. It is an asset because
the business avoids having to pay cash in the future for specific expenses. Examples of Prepaid
Expenses are: Prepaid Insurance; Prepaid Rent; and Supplies (Robles & Empleo, 2016; Valix et
al, 2017; Valix et al, 2019; Warren et al, 2017).
o Supplies can be Office Supplies, Cleaning Supplies, and/or Guest Supplies, depending on the
supplies purchased by the business. However, they should not be mistaken as part of the
inventory. Supplies are usually purchased with the intention to be used in the normal operation
of business which may include pens, pencils, bond papers, inks, etc. While Inventory are
purchased with the intention to sell.
-Current Assets are assets that do not fall under the criteria for current assets and are
considered non-current assets simply because (Robles & Empleo, 2016; Valix et al, 2017; Valix
et al, 2019; Warren et al, 2017):
1. They are not expected to be realized in the entity's normal operating cycle.
2. They are not held primarily for the purpose of trading.
3. They are not expected to be realized within 12 months after the reporting period.
4. They are cash and cash equivalents that are restricted.
(Robles & Empleo, 2016; Valix et al, 2017; Valix et al, 2019; Warren et al, 2017):
Property, Plant, and Equipment. These are tangible assets purchased to be used by the
business over a long period of time. They are used to help generate income for the business.
You can only record these assets if you have owned them.
Examples of Property, Plant, and
Equipment are Land; Building; Office Equipment; Machinery; Tools; etc. As individuals or as a
family, our land, home, car, jeep, truck, sala set, dining set, bed, and cabinets are our Property,
Plant, and Equipment.
uity method. It is an investment made by the business to
another business, which it has significant influence but does not have full control. The business
has decided to put their extra money into another business, which they have influence but does
not have the full control.
These types of assets are not tangible; you cannot see them nor touch
them, but they exist and are used by the business to generate income for the business. Intangible
assets need to be registered with the Intellectual Property Office for you to have an exclusive
right on these types of assets. Examples of which are Royalties, Patents, Rights, Trademarks,
Formula, Inventions, etc. So, if you have a creation, which you think is unique and can be sold
to companies, make sure to have them registered to have full ownership and control over this
type of asset.
-current Assets. This is where the other types of assets belong. Examples are:
Long-term refundable deposits and Long-term advances to officers.