ASSETS Ravailable to the business.
LIABILITIES O. of the business.
Statement of financial position
Assets minus Liabilities equals Ownership interest
A L = OI
The ownership interest is the residual claim after liabilities to third parties have been satisfied.
Assets Equals Liabilities plus Ownership interest
A = L + OI
A L OI
Financial Accounting
The balance analogy can be represented as:
A disturbance on one side of the balance will require a corresponding disturbance on the other
side if the balance is to be maintained.
Historical cost is the amount .for an asset or for a liability on the date
when.
Fair value is the price that would be received to sell an ….or transfer a ..
in an orderly transaction between.at the measurement date.
A p..
c.
L owned by the business
R owned by the business
W.. employed by the business
Major a undertaken by the business
A L +
OI
Financial Accounting
Should it be recognised as an asset? That is, should it be reported as a business asset in its
statement of financial position (balance sheet)?
Only if:
it meets the definition of an ;
the resulting information is and provides a .and
the costs pf providing information are not excessive in relation to the .
If there is a high level of uncertainty, then although the item might meet the definition of an
asset, it should not be reported (recognised) in the statement of financial position (balance sheet)
as an asset.
Recognise Not recognise
A liability is defined as
to transfer .
the settlement of which is expected to result in .
Present obligation: legal or as a result of commercial reality
Transfer an economic resource: cash or other resource leaving the business
Past events: normally receiving goods or services or borrowing money
Recognise if:
it meets the definition of a liability;
Financial Accounting
the resulting information is relevant and provides a faithful representation and
the costs of providing information are not excessive in relation to the benefits.
B. by the business
S. (VAT) payable by a business based on past sales.
An item that fails the recognition test, that is, it is not reported in the statement of financial
position (balance sheet), might well be reported in the notes to the accounts as a contingent
liability.
The ownership interest is the .. found by deducting all of the entitys
liabilities from all of the entitys assets.
The term is used as a shorter way of saying
total assets less total liabilities.
There are no separate recognition criteria for the ownership interest.
It is wholly dependent on the recognition of assets and liabilities.
How much better or worse off are the owners? This is calculated by comparing the financial
position of the business at two points in time.
At time t = 0 Assets(t0) Liabilities(t0) = Ownership interest(t0)
At time t = 1 Assets(t1) Liabilities(t1) = Ownership interest(t1)
Financial Accounting
Taking one equation away from the other may be expressed as:
Change in
(assets minus liabilities)
or
change in net assets
equals Change in ownership interest
Common causes of change in the total amounts of assets and liabilities and hence ownership
interest is as follows:
Normal business transactions: supplying goods and services to customers.
Owner contributing resources to the business (invest cash in the business).
or
Withdrawing resources from the business (withdraw cash from the business).
At the start of the year, a business had assets of £10 million and liabilities of £6 million.
At the end of the year, the same business had assets of £12 million and liabilities of £5 million.
What was the ownership interest at the start of the year? .
What was the ownership interest at the end of the year?
What was the change in ownership interest during the year? .
Financial Accounting
The net impact of business transactions is:
Revenue
minus
Expenses
equals
Profit
Another equation may now be derived from the basic accounting equation:
Change in Ownership
Capital contributed/withdrawn by
At the end of the accounting period, there will be a new level of assets and liabilities recorded.
These assets and liabilities will have resulted from the activities of the business.
Assets
minus
equals Ownership interest at the
start of the period
1. Ask yourself: Is this item an asset or a liability or a part of the ownership interest?
2. Choose the line in the table.
3. Ask yourself: Has the item increased or decreased?
4. Choose the box that contains the answer.
Asset Increase Decrease
5. Follow the action at the foot of the column (make a debit entry or a credit entry).
Asset Increase Decrease
Liability Decrease Increase
Ownership interest Decrease Increase
ACTION TO TAKE DEBIT ENTRIES IN A
LEDGER ACCOUNT
CREDIT ENTRIES IN A
LEDGER ACCOUNT
The ownership interest may be increased by:
earning revenue
new capital contributed by the owner
The ownership interest may be decreased by:
So the ownership interest section may be expanded as follows:
Debit entries in a
ledger account
Credit entries in a ledger
account
Left-hand side of the equation
Right-hand side of the equation