Chapter 4 : Balance Sheet
1.Balance sheet
• The balance sheet is a financial statement that details the entity’s assets, liabilities and equity as at a particular point in time — the end of the reporting period
• The balance sheet is a financial statement that shows:
what the entity owns (or controls) as at a particular date — the assets
the external claims on the entity’s assets — the liabilities (owe)
the internal claim on the entity’s assets — the equity. (owners)
Nature and purpose of the balance sheet
- Investing decision : decision involving the acquisition and sale of investments and productive non-current assets using cash , and lending money and collecting on those loans
- The mix debt and equity financing an entity chooses reflects its financing decision .( decision involving the mix of debt and equity financing chosen by the entity)
Accounting policy choices , estimate and judgements
Accounting choices applied to recognition and measurement of elements in the financial statements are referred to as accounting policy ( rules and practices , having substantial authoritative backing , that are recognized as a general guide for financial reporting )
2. Definition and recognition of ASSET
- Asset : a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
• The essential characteristics for an asset are:
the resource must be controlled by the entity
the resource must be as a result of a past event
future economic benefits are expected to flow to the entity from the resource.
Control
- An entity must control the item for that item to be considered as an asset and recognised on the balance sheet.
- The concept of control refers to the capacity of the entity to benefit from the asset in the pursuit of its objectives, and to deny or regulate the access of others to the benefit.
Past event
- Every asset must have arisen from a transaction that has happened
- A company cannot include an asset it will be getting in the future.
Future economic benefit
• Items must provide benefits to the entity that uses them in order to be regarded as assets
• Benefit can be cash or control of resources
3 . Recognition of asset :
• Probable
– It is more than likely that the future economic benefits will flow from the asset to the business controlling it.
• Reliably Measured
– The value of the asset can be measure reliably
– Involves the use of estimates
