LESSON 2

ASSETS, LIABILITIES AND

EQUITY: THE ACCOUNTING
EQUATION

Outline
1. Definition of Balance Sheet.
2. Components of Balance Sheets: assets, liabilities
and equity.
3. Assets.
4. Liabilities and stockholders equity.

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2.1.Definition of Balance Sheet
The annual accounts

• Balance Sheet
• Income Statement
• Statement of Changes in Equity
• Cash Flow Statement
• Notes to the Financial Statements

2.1.Definition of Balance Sheet

Balance Sheet

• Shows, at a given date, the company’s financial

position:
– the economic resources (assets) it controls and
– where its finance comes from (liabilities and
equity)

• From an economic point of view:

Represents financial resources received either from
shareholders (equity) or from external agents (liabilities)
that allow the firm to make the necessary investments
(assets) in order to be able to develop its business.
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2.2. Components of the Balance Sheet

INVESTMENTS RESOURCES

OWNER’S EQUITY
ASSETS &
LIABILITIES

2.2. Components of the Balance Sheet

• The structure of the Balance Sheet

reproduces the accounting equation

Assets = Owners’ Equity + Liabilities

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2.2. Components of the Balance Sheet

• Assets appear on the left-hand side and liabilities on

the right-hand side.

• Assets are sorted by liquidity – from less liquid (long-

term assets) to more liquid (current assets) – and
liabilities are sorted by payment – starting with those
that will be paid back in the long run (i.e. owners’
equity and long-term liabilities) and finishing with
those that are due in the short run (current liabilities).

2.2. Components of the Balance Sheet

Liquidity measures how quickly

an item can be converted to cash.

A balance sheet usually lists assets and

liabilities in the order of their relative liquidity.

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2.2. Components of the Balance Sheet

Format of the Balance Sheet in new P.G.C.

ASSETS LIABILITIES

A) Equity
A) Non-current assets
B) Non-current liabilities

B) Current assets C) Current liabilities

2.2. Components of the Balance Sheet

ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY

Resources Claims against the entity’s resources

owned or
controlled by
an entity Claims by Claims by owners
creditors (investors)

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2.2. Components of the Balance Sheet

An asset is a source of future economic benefits controlled

by a reporting entity as a result of past events or
transactions:

• Something a company owns

• That has future economic value
• Resulting from a past transaction or event

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2.2. Components of the Balance Sheet

• Which of the following elements must be

considered as an asset?

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2.2. Components of the Balance Sheet

A liability is 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:

•Something a company currently owes

•As a result of a past transaction or event
•Obligating the company to give up assets in the future

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2.2. Components of the Balance Sheet

• Which of the following elements must be

considered as a liability?

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2.2. Components of the Balance Sheet

Stockholders’ Equity is... what would be left of the

company’s assets if it pays all liabilities

• Also referred to as net assets

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2.2. Components of the Balance Sheet

Stockholders’ equity is comprised of:

• Contributed capital: amount invested in

organization by owners
• Retained earnings: amount earned by organization
and retained in the business

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2.3. Assets

ASSETS
A) Non-current assets
I. Intangible assets
II. Tangible fixed assets
III. Investment property
IV. Long-term investments in subsidiaries and associated companies
V. Long-term financial investments
VI. Deferred tax assets

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2.3. Assets

ASSETS
B) Current assets
I. Non-current assets held for sale
II. Inventories
III. Trade accounts receivables and other receivables
IV. Short-term investments in subsidiaries and associated companies
V. Short-term financial investments
VI. Accrual accounts
VII. Cash and cash equivalents

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2.3. Assets
Non-current assets
I. Intangible assets

Noncurrent, nonmonetary assets without physical

substance that are held for use in the production or
supply of goods or services or for administrative
purposes and which are expected to be used during
more than one period.

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2.3. Assets
Non-current assets
I. Intangible assets
1. Research and development.
2. Administrative concessions.
3. Intellectual property, trademarks and others.
4. Goodwill.
5. Computer software.
6. Other intangible assets.

Net of accumulated depreciation

Net of losses for assets impairment
 NET BOOK
VALUE

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2.3. Assets
Non-current assets
II. Tangible fixed assets

Assets of physical substance that are held by an

enterprise for use in the production or supply of
goods or services or for administrative purposes and
which are expected to be used during more than one
period.

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2.3. Assets
Non-current assets
II. Tangible fixed assets
1. Land and structures.
2. Plant and machinery, tools, furniture and
other tangible assets.
3. Tangible fixed assets in progress and
advances.

Net of accumulated depreciation

Net of losses for assets impairment
 NET BOOK
VALUE

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2.3. Assets
Non-current assets
III. Investment property

Real state (land and buildings) being held to:

• earn rentals, or
• for capital appreciation,
• or both,
rather than for use in production or supply of
goods or services, or for administrative
purposes, or for sale in the ordinary course of
business.

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2.3. Assets
Non-current assets
III. Investment property

An investment property generates cash-flows that are

largely independent from the entity’s other assets.
Examples:
• Land held for long-term capital appreciation
• A current vacant building that will be leased out

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2.3. Assets
Non-current assets
III. Investment property
1. Land.
2. Structures.

Net of accumulated depreciation

Net of losses for assets impairment
 NET BOOK
VALUE

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2.3. Assets
Non-current assets
IV. Long-term investments in subsidiaries
and associated companies
1. Holdings in equity.
2. Loans to companies.
3. Debt instruments.
4. Derivative financial instruments.
5. Other financial assets (deposits given)

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2.3. Assets
Non-current assets
V. Long-term financial investments
1. Holdings in equity.
2. Loans to companies.
3. Debt instruments.
4. Derivative financial instruments.
5. Other financial assets.

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2.3. Assets
Non-current assets: valuation criteria

1. Intangible assets, tangible fixed assets and

investment property.

2. Financial investments.

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2.3. Assets
Non-current assets: valuation criteria
1. Intangible assets, tangible fixed assets and
investment property.
Acquisition Cost: price in invoice plus other
expenses before putting into operation (taxes,
transportation expenses, installation, assembly…)

Production cost: Raw materials cost plus direct

costs and a proportion of indirect costs.

2. Financial investment.
Fair value: rational and unbiased estimate of the
potential market price of a asset (price + transaction costs)
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2.3. Assets
Current assets
I. Non-current assets held for sale
An entity shall classify a non-current asset as held
for sale if:
• its carrying amount (book value) will be recovered
principally through a sale transaction rather than
through continuing use, and
• the following circumstances are met:
– the asset must be available for immediate sale in
its present condition subject only to terms that are
usual and customary for sales of such assets
– its sale must be highly probable (less than one
year)
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2.3. Assets
Current assets

II. Inventories
Assets held, either for sale in the ordinary course of
business or in the process of production for such sale,
or in the form of materials or supplies to be consumed
in the production process or in the rendering of
services.

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2.3. Assets
Current assets

II. Inventories
1. Commercial (goods for sale).
2. Raw materials and other supplies.
3. Work-in process.
4. Finished goods.
5. Auxiliary products, consumables & replacements.
6. Advances to suppliers.

Net of losses for assets impairment

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2.3. Assets
Current assets
III. Trade accounts receivables and other
receivables

Include assets like trade accounts receivable,

receivables from affiliated companies, employee
receivables, etc.
Trade accounts receivable represents amounts
due from customers arising from transactions in
the ordinary course of business.

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2.3. Assets
Current assets
III. Trade accounts receivables and other
receivables
1. Trade accounts receivables for sale and services. (*)
2. Accounts receivables from subsidiaries and associated
companies. (*)
3. Sundry accounts receivables.
4. Employee receivables.
5. Assets for current tax.
6. Other receivables from public authorities.
7. Called subscribed capital receivable.
(*) Net of losses for assets impairment
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2.3. Assets
Current assets

IV. Short-term investments in subsidiaries

and associated companies
1. Holdings in equity.
2. Loans to companies.
3. Debt instruments.
4. Derivative financial instruments.
5. Other financial assets.

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2.3. Assets
Current assets

V. Short-term financial investments

1. Holdings in equity.
2. Loans to companies.
3. Debt instruments.
4. Derivative financial instruments.
5. Other financial assets (deposits given).

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2.3. Assets
Current assets
VI. Accrual accounts

Expenses paid in advance

Interest paid in advance

Accruals appear when revenues or expenses are

allocated to the reporting period coming to an end but
cash will be received in the next year and the company
may not recognize the right to receive cash (accounts
receivable) or the obligation to pay (accounts payable)
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2.3. Assets
Current assets
VII. Cash and cash equivalents
1. Cash
2. Cash equivalents
Financial instruments that:
• are readily convertible to know amounts of cash,
• in the date of acquisition the original maturity is three
months or less,
• have negligible risk of changes in value, and
• are used in the usual entity’s cash management.

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2.3. Assets
Current assets: valuation criteria
1. Trade accounts.
Nominal value.

2. Financial investment.
Fair value.

3. Inventories.
FIFO.
Weighted Average Cost.
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2.4. Liabilities and equity

LIABILITIES
A) EQUITY

A-1) Shareholders’ equity

A-2) Adjustments for changes in value
A-3) Grants, donations and legacies received

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2.4. Liabilities and equity

A) EQUITY
A-1) Shareholders’ equity
I. Capital.
1. Registered capital.
2. (Uncalled subscribed capital).
II. Additional paid-in capital (share premium).
III. Reserves.
1. Legal and statutory.
2. Other reserves.
IV. (Shares in the entity held by the entity).

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2.4. Liabilities and equity

A) EQUITY
A-1) Shareholders’ equity
V. Prior years' income.
1. Non-distributed income.
2. (Prior years' negative income).
VI. Other owners' contributions.
VII. Income for the year.
VIII. (Dividends paid in advance).
IX. Other equity instruments.

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2.4. Liabilities and equity

A) EQUITY
A-2) Adjustments for changes in value

I. Financial instruments available for sale.

II. Hedging operations.
III. Other.

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2.4. Liabilities and equity

A) EQUITY

A-3) Grants, donations and legacies received

Grants, donations and legacies, non returnable,

received from third parties that are not shareholders.

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2.4. Liabilities and equity
B) NON-CURRENT LIABILITIES
I. Long-term provisions.
1. Provisions for long-term employee benefits.
2. Environmental actions.
3. Provisions for restructuring.
4. Other provisions.
II. Long-term debt.
1. Debentures and other negotiable securities.
2. Long-term debt payable to credit institutions.
3. Long-term debt from leasing contracts.
4. Derivative financial instruments.
5. Other financial liabilities.
III. Long-term debt payable to subsidiaries and associated companies.
IV. Deferred tax liability.
V. Long-term accrual accounts.
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2.4. Liabilities and equity

C) CURRENT LIABILITIES
I. Liabilities linked to non-current assets held for sale.
II. Short-term provisions.
III. Short-term debt.
1. Debentures and other negotiable securities.
2. Short-term debt payable to credit institutions.
3. Short-term debt from leasing contracts.
4. Derivative financial instruments.
5. Other financial liabilities.
IV. Short-term debt payable to subsidiaries and associated co.

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2.4. Liabilities and equity

LIABILITIES
C) CURRENT LIABILITIES
V. Trade accounts payable and other payable.
1. Trade accounts payable for purchases and services.
2. Accounts payable to subsidiaries and associated companies.
3. Sundry accounts payable.
4. Salary payable.
5. Liability for current tax.
6. Other payables to public authorities.
7. Customer advances.
VI. Short-term accrual accounts.

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2.4. Liabilities and equity

Non-current liabilities
I. Long-term provisions

Liabilities that comply with the definition and

recognition criteria of the conceptual framework, but
there is uncertainty:
• regarding the amount of the liability or
• regarding the date of settlement.

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2.4. Liabilities and equity
Non-current liabilities
I. Long-term provisions
1. Provisions for long-term
140. Provisions for salaries and other employee benefits.
employee benefits.
2. Environmental actions. 145. Provisions for environmental actions.

3. Provisions for restructuring. 146. Provisions for restructuring.

4. Other provisions. 141. Provisions for taxes.

142. Provisions for other responsibilities.
143. Provision for decommissioning, restoration or
rehabilitation of fixed assets.
147. Provision for share-based payment transactions.

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2.4. Liabilities and equity

Non-current liabilities
V. Long-term accrual accounts

• Long-term advances from customers towards

future sales or services rendered

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2.4. Liabilities and equity
Current liabilities

C) CURRENT LIABILITIES
I. Liabilities linked to non-current assets held for sale.
II. Short-term provisions.
III. Short-term debt.
1. Debentures and other negotiable securities.
2. Short-term debt payable to credit institutions.
3. Short-term debt from leasing contracts.
4. Derivative financial instruments.
5. Other financial liabilities.
IV. Short-term debt payable to subsidiaries and associated co.

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2.4. Liabilities and equity

Current liabilities

LIABILITIES
C) CURRENT LIABILITIES
V. Trade accounts payable and other payable.
1. Trade accounts payable for purchases and services.
2. Accounts payable to subsidiaries and associated companies.
3. Sundry accounts payable.
4. Salary payable.
5. Liability for current tax.
6. Other payables to public authorities.
7. Customer advances.
VI. Short-term accrual accounts.
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2.4. Liabilities and equity
Current liabilities
• Liabilities linked to non-current assets held for sale:
– The liabilities of a disposal group classified as held for
sale are also presented separately from other
liabilities in the balance sheet.
– Those assets and liabilities are not offset and
presented as a single amount.

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