FINANCIAL STATEMENT ELEMENTS

Transaction are going to be categorised into broad basic classes so that

they financial effects are reflected in financial statements.
Financial statements relate either to financial position or financial
performance

Financial statement elements include assets, liabilities, equity, income

and expenses
Assets
• Asset. A resource controlled by an entity as a result of past events
and from which future economic benefits are expected to flow to the
entity (conceptual framework)
• Future economic benefit . The potential to contribute, directly or
indirectly, to the flow of cash and cash equivalents to the entity
• The potential may be a productive one that is part of the operating
activities of the entity. It may also take the form of convertibility into
cash or cash equivalents or a capability to reduce cash outflows, such
as when an alternative manufacturing process lowers the cost of
production
• Transactions or events in the past give rise to assets; those expected

to occur in the future do not in themselves give rise to assets.

• Assets can exist in physical (tangible) form or intangible

Assets

Assets can either be non current or current.

Non current assets can either be tangible or intangible

Tangible asserts have physical existence whereas intangible assets do

not have physical existence

 Non current
assets

Tangible Intangible

E.g. property
Land and Copy rights
plant and Good will
Buildings and patents
equipment
Liabilities
• 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.
• An obligation is a duty or responsibility to act or perform in a certain
way.
• Obligation may arise as a result of legally binding contracts or may be
constructed
Equity
• Equity. The residual interest in the assets of the entity after deducting
all its liabilities.
• This can also be referred to as capital
• Capital is the amount owed to the owner of the business by the
business.
• The definition of equity leads us to the accounting equation
The accounting equation

Assets = Capital + Liabilities

Accounting equation
• The accounting equation can be rearranged to

CAPITAL = ASSETS – LIABILITIES

Example of the accounting equation
• On 1 July 2015, Anna opened a small tuck-shop which sells
refreshments . She had $2,500 to inject into her business.
Questions
1. Does the business owe anything ?
2. Does the business own anything ?
Example continued
Solution 1
The business owes Anna 2500 in the form of capital which Anna
injected into the business . This is a typical application of the business
entity concept. If Anna decides to leave the business then the business
must pay Anna
Solution 2
The business owns 2500 cash received from Anna. The cash will be
treated as an asset.
• When Courtney Anna sets up her business:
• Capital invested = 2500
• Cash = 2500
in this way the accounting equation can be stated

CAPITAL = ASSETS – LIABILITIES

2500 = 2500 - 0
Example continued
• Suppose Anna uses 1800 of some of the money invested to buy
furniture and transfers 200 into the business bank account. Then the
financial position will be as
• 2500 – (1800+ 200) = 500 cash balance
CAPITAL = ASSETS – LIABILTIES
2500 FURNITURE 1800
BANK 200
CASH 500
CONTINUED
In the absence of liabilities in a business assets of the business will be
equal to the capital.

The situation will change if the business had some form of financial
obligations
the following is provided for a small business
Building at cost 32000
Inventory 6000
Receivables 600
Cash hand and bank 28400
Trade payables 7000
Use the above equation to draft the accounting equation
The accounting equation
• The accounting equation is widely used in financial accounting to

1. Determine the capital of a business

2. Calculate the net profit of a business
Income.

• Increases in economic benefits during the accounting period in the

form of inflows or enhancements of assets or decreases of liabilities

that result in increases in equity, other than those relating to

contributions from equity participants.

Expenses

Decreases in economic benefits during the accounting period in the form of

outflows or depletions of assets or incurrences of liabilities that result in

decreases in equity, other than those relating to distributions to equity

participants

These reflect expenditure spent in the day to day operations of the business
Drawings
Drawings are amounts or resources taken out of a business by its
owner for personal use.

Drawings deplete the owners equity in business.

ACTIVITY
Define the following terms
- Trade payables
- Trade receivables
- Prepayments
- Accruals
THE RECOGNITION OF FINANCIAL
STATEMENT ELEMENTS
• Recognition is the process of incorporating in the statement of
financial position or statement of comprehensive income an item that
meets the definition of an element and satisfies the following criteria
for recognition

This is the first stage of financial statement computation.

recognition
Financial statements elements are going to be recognised when

1. it is probable that any future economic benefit associated with the

item will flow to or from the entity; and
2. the item has a cost or value that can be measured with reliability.