ELEMENTS OF FINANCIAL STATEMENTS

You must be aware of five key elements of the Financial Statements?and understand their measurement and recognition.

In this episode, we discuss these elements as follows:

ASSET

An asset of an entity is:

a) a resource;

b) that is under the control of the entity;

c) that is expected to result in future economic benefits flowing to the entity, and that originated because of past events.

Use of assets/ ways that assets can be seen:

? Use the resources to provide services

? Use of an external party’s resources

? Convert the resources into cash through its disposal

There are different ways that all these assets can be accounted for using the Accounting Standards.

LIABILITY

The liability of an entity is:

a) a present obligation;

b) arising from past events; and

c) the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Things that result in liabilities

? Announcement of policies

? Electoral promises (they become liabilities when politicians come into power)

? Introduction and approval of the budget (once Parliament passes the Appropriation bill, it becomes a liability)

EXPENSES

An expense is the cost of operations that a company incurs to generate revenue. Businesses can write off tax-deductible expenses on their income tax returns if they meet the Revenue Authority’s guidelines.

Accountants record expenses through one of two accounting methods: cash basis or accrual basis.?

It can also be defined as a decrease in the net financial position of the entity other than decreases arising from ownership contribution.

REVENUE

Revenue is the income generated from normal business operations and includes discounts and deductions for returned merchandise.

?It can also be defined as the increase in the net financial position of the entity other than increases arising from ownership contributions.

EQUITY

Equity is the residual interest in the assets of the entity after deducting all its liabilities.

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