Studied by 1 person
Assest
An asset is a resource controlled by the entity (business) as a result of past events and from which future economic benefits are expected to flow to the entity.
What are the 3 parts of an asset?
Past transaction, present control and source document, future economic benefit
Liability
A liability is a 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.
What are the 3 parts of a liability?
Past, present obligation and to maintain a good relationship, outflow of future economic benefit.
Income
Income is increases in economic benefits during the year in the form of inflows or enhancements of assets or decrease in liabilities that result in increases in equity other than those relating to contributions from equity
What are the parts to income?
It will increase the economic benefit during the year as it will result in an inflow of assets from the bank or accounts receivable.
Owners equity will increase due to increase in the profit for the year but is not a contribution from the owner.
Expense
Expenses make a decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences in liabilities that result in decreases in equity other than those relating to distributions to equity participants.
What are the parts to expenses?
Decrease in the economic benefits, the asset (bank), due to an outflow of cash when it is paid.
The profit for the year will decrease the owners equity, but is not drawings.
To calculate Assets
Liabilities + Owners Equity
To calculate Liabilities
Assets - Owners Equity
To calculate Owners Equity
Assets - Liabilities
Monetary Measurement
All transactions in the financial statements must be reported in NZD because the business is based in NZ.
Historical Cost
Transactions are reported at the amount of cash paid or payable at the time of the transaction. This means that assets are reported at their original purchase price when acquired.
Main parts to Historical cost concept
Assets are reported at the amount of cash paid or payable at the time of purchase. The business does not intend to sell the asset or liquidate the business.
Current Asset
Will be turned into cash within the next accounting period e.g. bank, inventory, accounts receivable, supplies on hand.
Non-current asset
will stay with the business beyond the next accounting period. Business will use it to generate income e.g. building, vehicle, land, furniture
Going Concern
Financial reports are prepared on the assumption that the life of a business is expected to continue into the foreseeable future. The owner has no intention of selling or liquidating the business.
Current Liabilities
Will be paid within the next accounting period e.g. accounts payable.
Non-current Liabilities
Will be paid over a number of years e.g. loan, mortgage.
Main parts to going concern:
They will or will not use it in the next accounting period. The owner has no intention of selling or liquidating the business.
Position
Asset, Expenses and Profit
Performance
Income, expenses and Owners Equity
Period reporting
The life of the business is divided into periods of equal length to measure the performance and position of the business to make comparisons for a period.
Capital Expenditure
One-off expenditure that creates a non-current asset for example laptop and house. It benefits beyond the next accounting period. (12 months). Any expense incurred before you started using the asset.
Revenue Expenditure
These are regular expense that benefit the business within the current accounting period. Regular expenses / normal expenses. E.g. electricity, rent, wages.
Entity
Financial affairs of the business are kept separate and distinct from the financial affairs of the owners and other businesses.
