Accounting and Finance Virtual Internship Series – Part 1 The General Ledger Accounting / Financial Accounting or Reporting unit - Continuation

As a continuation on the earlier post on the operations of the Financial Accounting / Reporting unit, the postings that are being done usually involves one or two of the following that are referred to as the elements of a Financial statement; Assets, Liabilities, Equities, Revenue and Expenses

Please note that the Financial Accounting Standards Board (FASB), the standards setting body for the United States of America which issues the General Accepted Accounting Principles (US GAAP) recently issued a proposed new chapter to their current Conceptual Framework. This chapter proposes the introduction of five other elements of a Financial statements which are Gains; Losses; Investments by Owner; Distributions to Owners and Comprehensive Income

The first three of the conventional five elements usually form the content of the Statement of Financial Position (SFP). The SFP is a statement that shows what the Company owns and how they are financed (owners funds or borrowed funds) at a statement date.

Assets –Assets are resources controlled by an entity as the results of past events and from which future economic benefits are expected to flow to the entity. Assets are usually posted as Debits in the accounting ledgers with the corresponding credit entry to cash or other means of acquiring the Assets such as intercompany transfer or deferred payment option. Assets are typically shown under sub-categories in the Financial statement. As shown in the sample SFP below, there are sub-categories for Non-Current Asset such as Property, Plant and Equipment (PPE), Intangible Assets, Investment Properties, Right-of-Use Assets, Long term Financial Assets and other sub-categories. Current assets with sub-categories as Inventories, Account Receivable, prepayments, Cash and Cash Equivalents.

After initial recognition, which is usually at cost, there are distinct accounting treatments with respect to subsequent measurements and subsequent postings for most of the Asset sub-categories. Hence, there are different International accounting standards that deal with the Accounting treatments of these Assets categories. For example, IAS 16 on PPE, IAS 40 on Investment Property, IAS 38 on Intangible Assets, IFRS 9 on Receivables (impairment /Expected Credit Loss), IFRS 16 on Right-of-Use Assets, IAS 2 on Inventories.

Please read up on these standards to have a more detailed understanding.

 As an Accountant if you are charged with Fixed Assets Accounting, you could as well be concerned with the operational approvals that are involved for new Capital Expenditure for the Items under PPE. Having an understanding of the operational aspects of these transactions can make you a better Finance Business partner 

The second element, Liabilities, are present obligations arising from past events, the settlement of which is expected to result in an outflow from entity resources embodying economic benefits. Liabilities are usually classified as current liabilities (expected to be settled within 12 months after the reporting date) or as Non-Current Liabilities (expected to be settled more than 12 months after reporting date). See sample SFP below for examples.

One key thing to note is that liabilities have credit balances. So initial recognition of a liability is a credit posting. Subsequent settlement or reversal is a debit posting. Liabilities could arise from outright borrowing or deferred settlement of transactions such as account payable, taxes payable or employees related payments.

Arithmetically, the value of a liability of an entity is obtain by subtracting the owners’ interest (equity) from the total Assets.

Equity on the other hand, are the owners’ (residual) interest in the Asset of an entity after deducting all its liabilities.

Equity, like liability should have a credit balance. Initial posting should be a credit posting with an appropriate corresponding debit entry. Equity items that could be posted and found in the SFP include share capital, share premium, retained earnings / accumulated losses, revaluation gains / surplus.

Please note that to ensure accuracy of the postings of these elements, it is advisable that a Junior team prepare a posting proposal that should be approved by a more experienced team member.