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Accounting Elements Definition & Recogntion (Income (Definition…
Accounting Elements
Definition & Recogntion
AASB Framework
Definition criteria
Identify the important characteristics
of those elements.
Recognition criteria
Specify the conditions under which an item
should be recognized in financial statements.
Transaction must satisfy
definition
&
recognition criteria
in Financial Statements
Asset
Definition
"Resource
controlled by the entity
as a result of
past events
from which
future economic benefits
are expected to flow to the entity".
Bold words are
Essential characteristics
Recognition criteria
Probably future economic benefit will flow to entity.
Asset has a cost / value that can be measured reliably.
Current vs Non current asset
Current
Used / expected converted in cash ≤12 mnths.
Exp: Cash at bank, debtors, inventory.
Non-current
Longer term - >12 months
Exp: plant, machinery, buildings, office equipment etc.
Liabilities
Definition
"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."
Bold words are
Essential characteristics
Recognition criteria
Probable that future economic outflow will result from settling the present obligation.
The amount at which settlement will take place can be measured reliably.
Current vs non-current liabilities
Current
Pay ≤12 months.
Non-current
Pay >12 months.
Equity
Definition
Residual interest in the assets of the entity
after deduction of its liabilities.
Formula
Equity = Assets - Liabilities
Equity = Capital
Equity UP, Profit UP
Equity DOWN, Profit DOWN
Equity DOWN if have DRAWINGS
Income
Definition
"Increases in economic benefits during the accounting period in the form of inflows / enhancements of assets / decrease in liabilities that result in
increases in equity
,
other than those relating to contributions from equity
participants.''
Essential Characteristics
↑ owners equity
Result of business activities
Not contributions by owner
Recognition Criteria
Probably inflows of economic benefit occur
Amount of economic benefit will be measured reliably
Exp
Sales, Fees, Commission,
Interest, Royalties & Rent received
Expenses
Definition
''
Decreases in economic benefits
during the accounting period
in the form of outflows / reduce of assets / incurrences of liabilities that result decrease in equity,
other than those relating to distributions to equity
participants''.
Bold words are
Essential characteristics
Recognition Criteria
Probable outflows of economic benefit will occur
Amount will be measured reliably
Exp
Wages, rent, interest, electricity, telephone bills...