Financial Position and Accounting Principles

Current vs. Non-Current Assets

Current Assets:
- Assets expected to be sold within one year.
- Held for trading purposes.
- Include cash and cash equivalents, like 1 lac in cash.
Non-Current Assets:
- Assets with a life of more than one year.
- Subject to specific accounting criteria to be reported in the statement of financial position.

Property Definition:
- A broad definition of an asset.
- Internal accounting standards provide a clear definition of what property can be treated as an asset.
Criteria for Inclusion in Financial Statements:
- Future Economic Benefit: Property must be used in the business to generate revenue in the future.
  - Example: A vehicle owned but not used for business purposes cannot be reported as an asset.
    - If a bank is owned and not used for any business purpose, it can not be reported as an asset in financial statements.
- Control of the Asset: The business must have full control over the property, including ownership.
  - Example: A rented building is not an asset in accounting terms because the business does not own it.
- Reliable Measurement: The cost of the asset should be reliably measurable in financial terms.
  - Some assets, like patents, may not have easily measurable costs.

Initial Measurement:
- Report the asset at its cost when purchased.
Subsequent Measurement (International Accounting Standards):
- Cost of the asset minus depreciation.
- Account for impairment of the asset.
Impairment Loss:
- Compare the cost of the asset with its market value.
- If the market value is lower, recognize an impairment loss.
Example Scenario:
- Asset cost: 10000
- After depreciation, book value is 8000
- If the fair market value is 7000, an impairment loss of 1000 must be reported.
Reporting Value:
- Report the asset at the carrying value or fair market value, whichever is lower, in the statement of financial position.
- Impairment losses decrease the asset's value.

Assets with No Active Market:
- For unique assets like specific machinery or intangible assets like patents, alternative measurement methods are needed.
Reliable Measurement Approaches:
- Determine the cost incurred to generate the asset.
- Assess the price someone might be willing to pay.
- Consider the value in use.
Value in Use:
- Estimate the future value the asset will generate.
- Calculate the present value of future cash flows.
Present Value Calculation:
- Future cash flows must be discounted to their present value.
  - Example: 20000 expected in one year is not the same value as 20000 today due to inflation and other factors.

Inheritance Problems:
- Include assets developed or improved through business activities.
- Example: A building developed, a video enhanced, or improved shipping conditions.

Cash at Bank: Current asset.
Onka Asset (Vehicles): Non-current asset.
Manufacturing Product Line:
- Work-in-progress inventory.
- Example: Sugar cane being processed into sugar in multiple stages.
  - Raw material (sugar cane).
  - Extraction of juice.
  - Purification.
  - Boiling to create solid sugar.
- Half-finished inventory is a current asset.
Manufacturing Machine: Non-current asset if it helps generate future revenue.
Goodwill:
- Intangible asset representing a business's good reputation.
- Factors: good customer base, location, and brand name.
- Enhances the ability to generate revenue.
  - Example: iPhone vs. other brands due to brand image.
- Goodwill helps generate revenue, fitting the definition of a non-current asset.
Investment Property:
- Shares held with the intention to hold forever, not for sale.
- Reported as a non-current asset.

Total Assets:
- Non-current assets (land, buildings, machinery).
- Intangible assets (goodwill).
- Investment property (buildings).
- Cash and cash equivalents.
Cash Equivalents:
- Assets easily converted into cash.
- Shares are now quickly exchangeable due to online trading platforms.
Computer Equipment: Asset if owned by the company.

Definition: Anything owed to outsiders.
- Examples: payments to banks, suppliers.

Definition: Debts expected to be settled within one year.
Characteristics:
- Result from principal trading activities.
- Due to be settled within one year.
- The business does not have the right to defer settlement beyond one year.
Examples:
- Trades payable.
- Rent payable.
- Outstanding expenses.
Bank Overdraft:
- Short-term credit from the bank.
- The bank covers a check even if there are insufficient funds in the account.
  - Example: Paying Mister X 1000 when only 200 is in the account; the bank covers the 800 overdraft.
- Mostly available to business individuals.

Definition: Capital needed to run day-to-day business activities.
Example Scenario:
- Initial capital: 100000
- Purchase building: 40000
- Purchase motor van: 10000
- Remaining cash: 50000
- Purchase inventory: 50000
Importance of Cash:
- Necessary to pay bills, cleaning charges, and wages.
- Some capital should be reserved for day-to-day expenses.
Working Capital Calculation:
- Working Capital = Total Current Assets - Total Current Liabilities.
- Current assets should exceed current liabilities.
Example:
- Total current assets: 100000
- Total current liabilities: 60000
- Working capital: 40000
Trade Receivables:
- Cash: 40000
- Inventory: 50000
- Trade receivables: 10000
- Total current assets: 100000

Components:
- Owner's investment (share capital).
- Retained earnings (profit from previous years).
- Reserves.

Example 1: Initial Investment
- Owner invests 15000 into the bank.
- Assets = Equity + Liabilities: 15000 = 15000 + 0
Example 2: Borrowing from Bank
- Business borrows 5000 from the bank.
- Assets increase by 5000. Non-current liabilities increase by 5000. 20000 = 15000 + 5000
Example 3: Motor Van Purchase
- Cash decreases by 7000. Motor vehicle increases by 7000.
- 20000 = 15000 + 5000
Example 4: Equipment Purchase
- Equipment increases by 2500. Cash decreases by 2500.
- New cash balance: 10500. Total assets remain equal to the liabilities.
Example 5: Inventory Purchase on Credit
- Inventory increases by 9000 (current asset).
- Current liability increases by 9000. The overall balance is maintained.