Assets Liabilities and Equity
Assets Liabilities and Equity
Assets Liabilities and Equity
Accounting Theory
Submitted to:
Prepared by
Tiyas Kurnia Sari 14312524
Immellita Budiarti 14312566
Luky Fitri Angraini 14312206
I.
Assets
An asset is an item that the company owns, with the expectation that it
will yield future financial benefit. This benefit may be achieved through
enhanced
purchasing
power
(i.e.,
decreased
Recognition assets on the balance sheet also involves conditions that can
be called recognition rules. These rules have been formulated because
accountants require evidence to support their record in an environment of
uncertainty.
Some
conventions,
and
recognition
others
are
rules
are
formally
informally
designated
expressed
in
as
authoritive
made
Equipment is recorded as an asset when it purchased.
not gains.
C. Asset Measurement
Assets can be broadly categorized into short-term (or current) assets,
fixed assets, financial investments and intangible assets. Assets are
recorded on companies' balance sheets based on the concept of historical
cost, which represents the original cost of the asset, adjusted for any
improvements or aging. Historical cost is also called the book value.
Assets are all of the economic resources available to a firm. Types of
assets include,
1. Current Assets
Current assets are short-term economic resources that are expected
to be converted into cash within one year. Current assets include
cash and cash equivalents, accounts receivable, inventory, and
various prepaid expenses. While cash is easy to value, accountants
periodically reassess the recoverability of inventory and accounts
receivable. If there is persuasive evidence that collectability of
balances.
Accounts Receivable Accounts Receivable is an asset that
arises from selling goods or services to someone on credit.
The receivable is a promise from the buyer to pay the seller
according to the terms of the sale. This is an unusual asset
because it isn't an asset at all. It is more of a claim to an
asset. The seller has a claim on the buyer's cash until the
company
that
holds
notes
signed
by
expenses,
like
prepaid
accounts
receivable,
prepaid
expenses
are
assets
delivery car.
Supplies Many companies have miscellaneous assets that
are entire in product production that are too small and
inexpensive to capitalize. These assets are expenses when
they are purchased. A good example is car factory's bolts. It's
Liabilities
enterprise
of
resources
embodying
economic
benefits
(IASB
Framework).
The liabilities of a business are those things that belong to the business
but unlike assets have a negative financial value i.e. items that will require
the payment of money by the business at some point in the future.
Examples of liabilities include unpaid bills, unpaid taxes, unpaid wages,
rusty motor vehicles, stock that has passed its use-by date, overdrawn
bank accounts and money owed by the business to its creditors.
In simple words, liability is an obligation of the entity to transfer cash or
other resources to another party. Liability could for instance be a bank
loan, which obligates the entity to pay loan installments over the duration
of the loan to the bank along with the associated interest cost.
Alternatively, an entity's liability could be a trade payable arising from the
purchase of goods from a supplier on credit.
Liabilities imply a duty or responsibility to pay on demand or on an
occurrence of certain transaction or event. Liabilities also arise from
borrowings which may be made to improve business or personal income
and are paid back over an agreed period of an interval, which may be of
the short period or long period.
Types of Liabilities
1 Current Liabilities or Short Term Liabilities
Liabilities which are normally due and payable within one year are
grouped as current liabilities. These liabilities are also known as
short-term liabilities as they become due within a shorter period
(say within 1 year). Creditors, salaries and wages payable, gratuity
or bonus payable, interest payable, bills payable, sundry creditors,
bank overdraft or cash credit, unclaimed dividends, pre-received
incomes, sales tax payable, income tax payable, provisions, other
taxes payable, accrued expenses, instalments due within 1 year for
term loans, etc. are all examples of current liabilities. Current
liabilities are short-term financial obligations that are paid off within
one year or one current operating cycle, whichever is longer. (A
normal operating cycle, while it varies from industry to industry, is
the time from a company's initial investment in inventory to the
time of collection of cash from sales of that inventory or of products
created from that inventory.) Typical current liabilities include such
accrued expenses as wages, taxes, and interest payments not yet
paid; accounts payable; short-term notes; cash dividends; and
revenues collected in advance of actual delivery of goods or
services.
Economists, creditors, investors, and other members of the financial
community all regard a business entity's current liabilities as an
important indicator of its overall fiscal health. One financial indicator
associated with liabilities that is often studied is known as working
capital. Working capital refers to the dollar difference between a
business's total current liabilities and its total current assets.
Another financial barometer that examines a business's current
liabilities
is
known
as
the
current
ratio.
Creditors
and
1. Proprietary Theory:
Under the proprietary theory, the entity is the agent, representative, or
arrangement through which the individual entrepreneurs or shareholders
operate.
In this theory, the viewpoint of the owners group is the center of interest
and it is reflected in the way that accounting records are kept and the
financial
statements
are
prepared.
The
primary
objective
of
the
the common shareholders are part of the proprietor group, and preferred
shareholders are excluded. Thus, preferred dividends are deducted when
calculating the earnings of the proprietor (equity shareholders)(Bird,
Davidson, & Smith, 1974).
This narrow form of the proprietary theory is identical to the residual
equity concept in which the net income is extended to deduct preferred
dividends and arrive at net income to the residual equity on which will be
based the computation of earnings per share.
In the second form of the proprietary theory, both the common capital and
preferred capital are included in the proprietors equity. Under this wider
view, the focus of attention becomes the shareholders equity section in
the balance sheet and the amount to be credited to all shareholders in the
income statement.
2. Entity Theory:
In entity theory, the entity (business enterprises) is viewed as having
separate and distinct existence from those who provided capital to it.
Simply stated, the business unit rather than the proprietor is the center of
accounting interest. It owns the resources of the enterprises and is liable
to both, the claims of the owners and the claims of the creditors.
Accordingly, the accounting equation is:
Asset = Equities or
Assets = Liabilities + Shareholders Equity
Assets are rights accruing to the entity, while equities represent sources
of the assets, consisting of liabilities and the shareholders equity. Both
the creditors and the shareholders are equity holders, although they have
different rights with respect to income, risk, control and liquidation.
Thus, income earned is the property of the entity until distributed as
dividends to the shareholders. Because the business unit is held
responsible for meeting the claims of the equity holders, the entity theory
Finally, both the entity theory, with its emphasis on proper determination
of income to equity holders, and the proprietary theory, with its emphasis
on proper asset valuation, may be perceived to favour the adoption of
current values or valuation bases other than historical costs (Clark, 1993).
D. The transactions and events that change equity.
The transactions and events that influence or do not influence equity have
been displayed in the Exhibit 7.1. In this Exhibit class B shows the sources
of changes in equity and distinguishes them from each other and from
other transactions, events and circumstances affecting an enterprise
during a period (classes A and C)(IASB, 2013).
The possible sources of changes in equity can be (1) Comprehensive
income (2) all changes in equity from transfers between the enterprise
and its owners. Further, comprehensive income is the result of revenues
and expenses, gains and losses. The changes in equity due to transfers
between the enterprise and its owners may be in the form of investments
by owners and distribution to owners.
In the Exhibit class C includes no changes in assets or liabilities. Class A
includes all changes in assets and liabilities not accompanied by changes
in equity such as exchange of assets for assets, exchange of liabilities for
liabilities, acquisitions of assets by incurring liabilities, settlement of
liabilities by transferring assets. It means all transactions and events do
not affect owners equity.
IV.
Refrences
ACCA. (2015, August 10). Retrieved from IASB's Conceptual Framework for
Financial Reporting: http://www.accaglobal.com/lk/en/student/examsupport-resources/fundamentals-exams-studyresources/f7/technical-articles/iasb-conceptual-framework-financialreporting.html
Accounting Base. (n.d.). Retrieved from Assets, Liabilities & Equity - An
Intro: http://www.accountingbase.com/IntroALE3.html