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Title: The Accounting Equation
Description: We have a look at the beginnings of what's involved in accounting.
Description: We have a look at the beginnings of what's involved in accounting.
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The accounting equation – lecture 2
• Assets – resources available to the business – produce wealth for the owner
• Liabilities – obligations of the business – to other parties (including owners)
Statement of financial position/balance sheet:
𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 𝑒𝑞𝑢𝑖𝑡𝑖𝑒𝑠 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝐴 − 𝐿 = 𝐸
also can be viewed as:
𝑎𝑠𝑠𝑒𝑡𝑠 = 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑒𝑞𝑢𝑖𝑡𝑖𝑒𝑠
𝐴 = 𝐿 + 𝐸
The liabilities and the equity are the obligations of the business
...
Can we restrict access?
• As a result of past events – some kind of transaction
• Future economic benefits will follow – will cash be generated in the future?
• Capable of reliable measurement – can we reliably estimate the future economic
benefits?
Examples:
• Land and buildings
• Raw materials – what makes the product
• Cash balances held by business
• Cars and other vehicles used for the business
• Machinery and tools used in production
• Offices, computers, etc…
Recognition of an asset:
Recognised = included in balance sheet
ONLY IF it is possible to record the future possible economic benefits that will flow
AND the asset has a cost or value that can be measured reliably
...
Liabilities:
• A present obligation of a business – legal or from commercial
• From past events – normally receiving G&S or borrowing money
• Outflow of resources (often cash) – cash or other resources leaving the business
• Capable of reliable measurement
If there is sufficient evidence of outflow likely, and it’s recognised as a liability, it’s included
in the balance sheet
...
• This is especially useful when there may be potential liability due to defective
products and ongoing legal action, but as the value of this is not yet known, it can
not be reported
Title: The Accounting Equation
Description: We have a look at the beginnings of what's involved in accounting.
Description: We have a look at the beginnings of what's involved in accounting.