LUBS 1235 2.3 Define key terms used in the financial statements, such as assets, liabilities, equity, revenue, expenses and profit

What are the two main sides of a Statement of Financial Position (SFP)

Assets (resources owned) on one side, and Claims (obligations to owners and others) on the other

What is an Asset

A resource held by a business that:

• Has potential to produce future economic benefit,

• Is controlled by the business, and

• Can be measured in monetary terms

Give examples of Assets

Land and buildings, machinery, motor vehicles, inventories, trade receivables, investments, cash, patents, and trademarks

What are Non-current assets

Assets held and used on a long-term basis to generate wealth (e.g., land, equipment, vehicles, computers)

What are Tangible Non-current assets

Physical assets like land, buildings, and equipment

What are Intangible Non-current assets?

Non-physical assets such as goodwill, patents, copyrights, and trademarks

What are Current assets

Assets expected to be sold, consumed, or realised within a year or within the normal operating cycle

Give examples of Current assets

Inventories, trade receivables (debtors), cash, and prepayments

What is a Claim in accounting terms

An obligation of the business to provide cash or other benefits to an outside party

What are the two main types of Claims

Equity (owners’ claims) and Liabilities (claims of external parties)

What is Equity

The amount invested by the owner(s) in the business and the residual interest they can claim after liabilities are paid

What are Liabilities

Obligations to transfer economic resources (usually cash) to others as a result of past transactions or events

What are Current Liabilities

Amounts due for payment within 12 months, such as trade payables, overdrafts, short-term loans, and accruals

What are Non-current Liabilities

Long-term obligations not due within 12 months, such as long-term loans or loan notes

What is Revenue

The inflow of assets (like cash or receivables) or reduction in liabilities arising from trading activities such as sales or services

When can Revenue be recognised

When:

• The amount can be measured reliably,

• Economic benefits are probable, and

• Ownership/control of goods has passed to the buyer.

What are Expenses

The outflow of assets or increase in liabilities incurred in generating revenue (e.g., wages, rent, utilities)

What is Profit

The excess of revenue over expenses during an accounting period — a measure of financial performance

How is Profit shown in financial statements

In the Income Statement, calculated as Revenue – Expenses for the period

How do Assets, Liabilities, and Equity relate to each other

They are linked by the accounting equation:

Assets = Liabilities + Equity