Unit 3.4 Chp 1-4

18 UNIT 3 FINANCIAL ACCOUNTING FOR A TRADING BUSINESS
1.6 Elements of Accounting reports
We have discussed at length the qualities that Accounting reports should possess,
but what items should they include? The Framework identifies the Elements of the
Accounting reports as:
• assets
• liabilities
• owner’s equity
• revenues
• expenses.
asset
a present economic resource
controlled by an entity as a
result of past events
Assets
The word ‘asset’ is used in a variety of settings, usually to describe ‘something of
value’ (such as ‘she’s a real asset to her team’). In Accounting, the term ‘asset’ still
has connotations of value, but it is defined in a very specific way and, as with most
Accounting terms, the specifics of the definition are very important in determining
whether an item can in fact be identified as an asset.
In Accounting, an asset is defined as a present economic resource controlled by an
entity as a result of past events, where an ‘economic resource’ is a right that has the
potential to produce economic benefits. Let’s explore this definition a little further.
Present economic resource
Economic resources are simply items have the potential to produce economic or
financial benefits for a business, such as ‘Bank’ (the cash held there, not the building),
‘Accounts Receivable’ (debtors), ‘Inventory’ (stock), vehicles and premises.
Under this definition items need only to represent potential economic benefits to
be recognised as assets. The idea of potential economic benefit recognises that assets
represent some sort of future economic benefit – a benefit that is yet to be received.
This reflects the Going concern assumption. For example, cash in the bank can be spent
and inventory can be sold at some point in the future; the amount owed to the business
by its Accounts Receivable will be received as cash at some time in the next month or
so; and items such as premises and vehicles will usually be used for business activities
for a number of years into the future.
On the other hand, cash paid for this month’s wages is not an asset, as there is no
potential benefit. In order to gain a further benefit from employees, a further payment
must be made. Items such as this cannot be classified as assets because their benefit
does not extend beyond what has already been received.
The idea of potential economic benefit also means that businesses can recognise
assets even when the benefit may not eventuate. For instance, inventory may remain
unsold, and Accounts Receivable may not pay, but because they both represent potential
economic benefits both may be recognised as assets.
Controlled by the entity
Further, only those items that are controlled by the entity can be defined as assets. The
definition explains that what makes these items assets for a specific business is not
ownership, but instead:
• the ability to determine how and when the item is used (such as how and when
the cash in the bank account will be spent, when Accounts Receivable are
expected to pay or how the vehicles will be used) and/or
• the right to access the benefits (such as the cash from inventory or Accounts
Receivable, or the use of a vehicle or premises).
ISBN 978-1-108-46989-0 © Simmons et al. 2019 Cambridge University Press
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