accointing info lecture 4

8/8/2019 Accointing Info Lecture 4

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LECTURE 4:

Chapter 6: Balance Sheet (Pages

134 to 143)



Learning Objectives

1. Appreciate the nature and purpose of the balance sheet.

2. Understand the asset definition andrecognition criteria.

3. Understand the liability definition andrecognition criteria.

4. Understand the definition and nature of equity.



Chapter preview

The Balance Sheet lists an entity¶sassets, liabilities and equity at aparticular point in time.

Assets can be thought of as itemsthat the entity owns (or controls) with

liabilities and equity representingexternal and internal claims on theseitems respectively.



The Balance Sheet

The Balance Sheet:

Reflects the financial position of an entity

at a particular point in time Lists an entity¶s assets, liabilities and

owner¶s equity at this point in time

(reporting date)

Reflects the assets in which the entityhas invested (its investing decisions)

and how the entity has financed the

assets (its f inanc

ing dec

isions)



Jasmin Pty Ltd

Balance Sheet(as at 30 June 2008)



Assets/Liabilities/Equity

Asset¶s are what the business owns

or controls

Liabilities are the external claims on

the entity¶s assets and

Equity is the internal claims on assets



The accounting equation

Assets = Liabilities + Equity

(Note: the owner is always

segregated from the business ±

accounting entity convention)



Asset definition

According to the Framework an

asset is:

µa resource controlled by the entityas a result of past events and from

which future economic benefits are

expected to flow to the entity¶ e.g.

cash; property; goodwill; receivables;inventory



To be regarded as an asset

three essential

characteristics must be met:

1. must provide future economicbenefits to the entity

2. must be controlled by the entity

3. must be a result of pasttransactions or events



Asset recognition

To be recognised as an asset on the

balance sheet, the future economic

benefits must be probable and capable of

being measured reliably.

Note: recognition means recording items

in the financial reports with a monetaryvalue assigned to them (monetary

concept)



Liability definition

According to the Framework a

liability is:

µA 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.¶



To be regarded a liability

three essential characteristicsmust be met:

1. Outflow of resources embodying

economic benefits

2. A present obligation to another

entity

3. A result of past events



Liability recognition

To be recognised as a liability on

the balance sheet, the outflow of

resources embodying future

economic benefits must be probable

and capable of being measured

reliably.



Summary of asset and liability

definition and recognition

criteria



Definition and nature of

equityEquity is defined in the Framework as:

µThe residual interest in the assetsof the entity after deducting all itsliabilities.¶

Note: Equity cannot be definedindependently of assets andliabilities.



Definition and nature of

equity (cont.)

Equity = Assets ± Liabilities

The equity balance represents theowner¶s claims on the entity¶s net

assets

In the balance sheet equity is shownas the owner¶s contribution/s plus

any gains or losses made (realised

or unrealised).



Workshop Question

Identify whether the following items

would be classified as an asset (A),

liability (L), or equity (E). If they are

classified as an asset or liability

determine if they are a current asset or

liability (C) or a non-current asset or

liability (NC).



Workshop Question

(continued) Shares in list companies

Work in progress

Unearned income Ordinary shares, fully paid

Accounts receivable

Accounts payable Plant and equipment



Workshop Question

(continued)

Future income tax benefit

Allowance for annual leave

Asset revaluation reserve Buildings

GST payable

Prepayments Current tax liabilities

accointing info lecture 4

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