Accounitng and Profit Equation

what is the basic foundation of accounting?

accounting entity

accounting entity concept

the business is identified as an independant unti from its owners

to whom are the financial statements are prepared for?

to the busines organization (**not to the owners because of the business entity concept**)

transactions and events of an entity can be divided as

1. transactions and events which can be measured by cash

2. transactions and events which cannot be measured by cash

what are recorded in the accounting records?

transactions and events that can be measured by cash

do we record transactions and events that cannot be measured by cash?

no we do not record transactions and events that cannot be measured by cash

which equation shows the relationship between assets, capital and liabilities of the business?

Assets = Capital + Liabilities.

what is known as the basic accounting equation?

Equity(capital) + Liabilities = Assets

what are the elements in financial statements?

1. income

2. expense

3. capital

4. asstes

5. liability

Assets (definition)

A present economic resource controlled by the entity as a result of a past events

characteristics of assets as per the framework for preparation of financial statements.

1. result of a past transaction or event

2. controlled by the business

3. present economic resource.

which of the following are the characteristics of an asset as per the conceptual frame work for finacial accounting

A- It is a resource controlled by a firm

B- present economic benefits are expected to flow into the firm

C- its cost or value can be measured reliably

A and B only

which of the following is an essential characteristic of an asset?

1. having a limited useful life

2. tangibility

3. arising from the future transactions and events

4. embodying present economic benefits

5. control over economic benefits always stems from legal ownership

4

if the value or the cost of the asset cannot be measured reliably,
IS IT recorded in the financial statements?

no. if it can be only measured we record them in the books

Liabilities (definition)

A present obligation of the entity to transfer an economic resource as a result of past events

characteristics of liabilities as per the framework for preparation of financial statements

1. Result of a past transaction or event

2. present obligation

3. transfer an economic resource

as a result of an event?
→Contractual Obligations: A company enters into a contract to purchase goods or services, creating a liability to pay for them. 

→Legal Claims: A company is sued for damages, creating a potential liability if the lawsuit is successful. 

→Warranty Obligations: A company provides warranties on products, creating a liability to repair or replace defective items. 

what are assets classified as?

Noncurrent assets - assets with a useful life of more than one financial year

Current assets - assets with a useful life of less than one financial year.

if the value of the liability is not measured reliably, is it recorded in the financial statements?

no, only if they can be measured they are recorded.

how are liabilities classified?

Noncurrent Liabilities - liability with more than one financial year

Current liabilities - liabilities with less than one financial year

Equity (definition)

The difference between the total assets and the liabilities of the entity can be identified as equity.

how is equity treated?

as net assets

what is the equation for net assets?

total assets - total liabilities = net assets / equity

what transactions may change the equity of a business?

increase

→1. additional capital

→2.Income/ profit

decrease

→3. drawings

→4.expenses /loss

Income (definition)

increase in assets or decreases in liabilities that result in increases in equity, other than those relating to contributions from the holders of equity claims ( capital and additional capital )

Expenses (definition)

Decrease in assets or increase in liabilities that result in decreases in equity, other than those relating to contributions from holders of equity claims ( drawings )

nature of the economic benefits that are relevant toa business in earning an income

1. the flow cash to the business - ( cash sales )

2. increase of assets in the business - ( credit sales )

3. decrease in liabilities ( Discount recieved )

nature of the economic outflows that are relevant to a business incurring it expenditure

1. The outflow of cash from the business ( rent paid )

2. decrease in assets in the business ( depreciation / bad debts )

3. increase in liabilities ( accrued expenses / credit purchases)

state whether the following items could be recognized as income of a trading company, as per the conceptual framework for financial accounting,

1. cash sales

2. proceeds from the sale of the building

3. interest receivable on a fixed deposit for the current year

1. yes

2. no

3. yes

Recognition of the elements of the financial statements
( common features of the elements )

1. relevant information about the asset or the liability and about any the income, expenses, or changes in equity.

2. a faithful representation of the asset or the liability and of any income, expense, or changes in equity

3. it should comply with the definition