FABM-1-Assets-Liabilities

Introduction

• Lesson Objective: Classify and identify assets, liabilities, and owner’s equity/capital as the basic elements of accounting.

Essential Characteristics of an ASSET

• Control: The asset is controlled by the entity.

• Past Events: It is the result of past events.

• Future Benefits: The asset provides future economic benefits.

• Reliable Measurement: The cost of the asset can be measured reliably.

Two Major Classifications of ASSETS

• Current Assets

• Non-Current Assets

Current Assets

• Definition: Under PAS 1/IAS 1, classified as current if:

  • a. Expected to be realized or intended to be sold/consumed in normal operating cycle

  • b. Held primarily for trading purposes

  • c. Expected to be realized within twelve months after the reporting period

  • d. Cash and cash equivalents unless restricted from being exchanged or used to settle liabilities for at least twelve months.

Normal Operating Cycle

• Time span where cash is used to acquire goods/services, sold to customers, who then pay with cash.

Common Examples of Current Assets

1. CASH

   • Includes coins, currencies, checks, and bank deposits.

2. CASH EQUIVALENTS

   • Short-term investments readily convertible to cash. Examples:

     • 3-month BSP Treasury Bill

     • 3-month time deposit

3. MARKETABLE/TRADING SECURITIES

   • Stocks and bonds held for a short time.

4. TRADE AND OTHER RECEIVABLES

   • Includes:

     • Accounts Receivable

     • Notes Receivable

5. INTEREST RECEIVABLE

   • Interest collectible on promissory notes.

6. ADVANCES TO EMPLOYEES/OFFICERS

   • Loans to employees payable in cash or salary deductions.

7. INVENTORIES

   • Assets held for sale or in production.

8. PREPAID EXPENSES

   • Expenses paid before being used. Examples: prepaid rent/insurance.

9. CONTRA-ASSET ACCOUNTS

   • Deductions from related asset accounts, e.g., allowance for bad debts.

Non-Current Assets

• Definition: Under PAS 1/IAS 1, all assets not classified as current. generate money over a year.

Common Examples of Non-Current Assets

1. FIXED ASSETS (Property, Plant and Equipment)

   • Tangible assets held for production or rental. Examples:

     • Land

     • Buildings

     • Equipment (machinery, furniture, office equipment)

2. LONG-TERM INVESTMENTS

   • Assets for wealth accretion, not directly tied to operating activities. Examples:

     • Investment in securities

3. INTANGIBLE ASSETS

   • Non-monetary assets without physical substance. Examples:

     • Patent, Copyright, Trademark, Franchise, Goodwill

Essential Characteristics of a LIABILITY

• Present Obligation: Liability is the current obligation of an entity.

• Past Event: Originates from past events.

• Outflow of Resources: Settlement requires an outflow of economic benefits.

Two Major Classifications of LIABILITIES

• Current Liabilities

• Non-Current Liabilities

Current Liabilities

• Definition: Classified as current if:

  • a. Expected to settle within the operating cycle

  • b. Primarily held for trading purposes

  • c. Due within twelve months

  • d. No right to defer settlement for twelve months.

Common Examples of Current Liabilities

1. ACCOUNTS PAYABLE

   • Arises from purchases on open accounts.

2. NOTES PAYABLE

   • Indebtedness evidenced by a promissory note.

3. LOANS PAYABLE

   • Liability to pay borrowed funds.

4. UTILITIES PAYABLE

   • Obligations to utility companies.

5. TAXES AND LICENSES PAYABLE

   • Payables to the government.

6. UNEARNED REVENUES

   • Obligations for services not yet provided.

7. ACCRUED LIABILITIES

   • Expenses incurred but not yet paid.

Non-Current Liability

• Definition: Long-term obligations payable beyond one year.

Common Examples of Non-Current Liabilities

1. LONG-TERM NOTES PAYABLE

   • Obligation evidenced by a promissory note beyond one year.

2. BONDS PAYABLE

   • Formal promise to pay a specified sum at a future date.

3. MORTGAGE PAYABLE

   • Long-term obligation secured by real properties.