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    Basic Accounting Model

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    dlinds2X1
    The basic accounting model states that assets equal liabilities plus owner's equity. Assets are resources that provide future economic benefits and can be reliably measured. Assets are either current, meant to be used within a year, or non-current. Liabilities are present obligations that will require an outflow of resources. Liabilities are also current, meant to be settled within a year, or non-current. Equity is the residual claim on assets after deducting liabilities. Accounting provides financial information to help users like investors and creditors make economic decisions. The accounting cycle involves sequential steps to process transactions each period.

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    Basic Accounting Model

    Uploaded by

    dlinds2X1
    1K views3 pages
    The basic accounting model states that assets equal liabilities plus owner's equity. Assets are resources that provide future economic benefits and can be reliably measured. Assets are either current, meant to be used within a year, or non-current. Liabilities are present obligations that will require an outflow of resources. Liabilities are also current, meant to be settled within a year, or non-current. Equity is the residual claim on assets after deducting liabilities. Accounting provides financial information to help users like investors and creditors make economic decisions. The accounting cycle involves sequential steps to process transactions each period.

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    The basic accounting model states that assets equal liabilities plus owner's equity. Assets are resources that provide future economic benefits and can be reliably measured. Assets are either current, meant to be used within a year, or non-current. Liabilities are present obligations that will require an outflow of resources. Liabilities are also current, meant to be settled within a year, or non-current. Equity is the residual claim on assets after deducting liabilities. Accounting provides financial information to help users like investors and creditors make economic decisions. The accounting cycle involves sequential steps to process transactions each period.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1K views3 pages

    Basic Accounting Model

    Uploaded by

    dlinds2X1
    The basic accounting model states that assets equal liabilities plus owner's equity. Assets are resources that provide future economic benefits and can be reliably measured. Assets are either current, meant to be used within a year, or non-current. Liabilities are present obligations that will require an outflow of resources. Liabilities are also current, meant to be settled within a year, or non-current. Equity is the residual claim on assets after deducting liabilities. Accounting provides financial information to help users like investors and creditors make economic decisions. The accounting cycle involves sequential steps to process transactions each period.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Basic Accounting Model:

    Assets = Liabilities + Owner’s Equity


    Assets – are defined as “resources controlled by the entity as a result of past transactions and
    events and from which the future economic benefits are expected to flow to the entity.
    Essential Characteristics:
    1. Controlled by the entity – control is the ability to obtain the economic benefits and to
    restrict the access of others
    2. Result of past transactions or events – the event must be past before an asset can arise
    3. Provides future economic benefits – evidenced by the prospective receipt of cash
    4. The cost of an asset can be measured reliably.
    Classification of Assets:
    a. Current Assets
    - It expects to realize the asset, or intends to sell or consume it, in its normal operating
    cycle.
    - It holds the asset primarily for the purpose of trading.
    - It expects to realize the asset within twelve months after reporting period.
    - The asset is cash or a cash equivalent unless the asset is restricted from being
    exchanged and used to settle a liability for at least twelve months after the reporting
    period.
    EXAMPLES: cash, accounts receivable, notes receivable, inventories, prepaid expense
    b. Non-current Assets
    - residual definition of current assets
    EXAMPLES: property, plant, and equipment, intangible assets
    Liabilities – are defined as “present obligations of an entity arising from past transactions or
    events, the settlement of which is expected to result in an outflow from the entity of resources
    embodying benefits”.
    Essential Characteristics:
    a. present obligation
    b. result of past transactions or events
    c. requires an outflow of resources embodying economic benefits
    Classification of Liabilities:
    a. Current Liabilities
    - It expects to settle the liability in its normal operating cycle.
    - It holds the liability primarily for the purpose of trading.
    - The liability is due to be settled within twelve months after the end of reporting
    period.
    - The entity does not have an unconditional right to defer settlement of the liability for
    at least twelve months after reporting period.
    EXAMPLES: accounts payable, notes payable, accrued liabilities, unearned revenues
    b. Non-current Liabilities
    - residual definition of non-current liabilities
    EXAMPLES: mortgage payable, bonds payable
    Equity – is the residual interest of the entity after deducting all its liabilities. (Equity = Assets –
    Liabilities)
    a. capital – used to record original and additional investments of business entity’s owner.
    b. withdrawals/drawings
    c. income summary – shows profit or loss
    Income – are increases in economic benefits during the accounting period in the form of inflows
    or enhancements of assets or decreases of liabilities that result in increases in equity, other than
    those relating to contributions from equity participants.
    Revenue – is the income in the course of ordinary activities of an enterprise.
    Gains – represent other items that may, or may not arise, in the course of ordinary activities of an
    enterprise.
    Expenses – are decreases in economic benefits during the accounting period in the form of
    outflows or obligations of assets or incurrences of liabilities that result in decreases in equity,
    other than those relating to distributions to equity participants.
    Losses – may represent other items that may, or may not arise, in the course of ordinary activities
    of an enterprise.
    Normal Balances of Debit and Credit
    Debits – DEAD (debit: expenses, assets, drawings)
    - an increase of EAD; decrease of LOR
    Credit – CLOR (credit: liabilities, owner’s equity, revenue)
    - an increase of LOR; decrease of EAD
    Accounting – is a service activity. Its function is to provide information, primarily financial in
    nature, about economic events that is intended to be useful in making economic decisions.
    Users of Financial Information
    - investors (existing and potential)
    - lenders and other creditors
    - employees
    - customers
    - governments and government agencies
    - public
    Accounting Cycle – refers to a series of sequential steps or procedures to accomplish the
    accounting process. This cycle is repeated each accounting period.

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