2023/24 ACADEMIC YEAR

UGBS 205: FUNDAMENTALS OF

ACCOUNTING
WEEK 3- Recognition and Measurement of
Elements of Financial Statements
 Overview
• This session presents the various elements of financial
statements and how they are recognized and measured. It
further examines how the elements in financial statements
relate to each other.

Godfred, Edem & Rita UGBS Slide 2

 Learning Objectives
• At the end of this session, you should be able to
– Identify the components of financial statements
– Discuss the elements of financial statements
– Explain the accounting equation
– Determine the effects of transactions on the accounting
equation
– Explain the concept of double entry in accounting

Godfred, Edem & Rita UGBS Slide 3

 Reading List
• Read Chapter 1 and 10 of Recommended Text –
– Chapters 4 & 6 of Marfo-Yiadom, Asante & Tackie (2015)
– Chapters 1 and 10 Wood, F. & Sangster, A. (2008). Frank Wood’s
Business Accounting 1. Volume 1. Pearson Education.

• Other Financial Accounting text books available to students

Godfred, Edem & Rita UGBS Slide 4

 Classes of Financial Statements

• Do you recall the components of

financial statements prepared by
business organizations?

Godfred, Edem & Rita UGBS Slide 5

 Classes of Financial Statements
Financial statements can be classified
into;
– General Purpose Financial Statements
• Information to wide range of users

– Special Purpose Financial Statements

• Information to a particular user or group

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 Elements of Financial Statements
• Income
• Expenses
• Assets
• Liabilities and
• Equity
– Are the elements of the financial statements
– Hence they are the building blocks used in
constructing financial statements

Godfred, Edem & Rita UGBS Slide 7

Elements of Financial Statements

Directly related to • Income

performance • Expenses

• Assets
Directly related to • Liabilities
financial position
• Equity

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8
 Assets

Economic resources

Probable future
economic benefits
obtained or controlled
by a particular entity as
a result of past
transactions or events

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 Classification of Assets
• Assets from which future economic benefits are

Current expected to flow to the entity in not more than a year

after the reporting period
• The intention to turn them into cash within one year
Assets • Examples; inventories/stock, trade receivables/debtors,
accounts receivables/prepayments, bank, cash etc…

• Assets from which future economic benefits are

Non- expected to flow to the entity in more than a year after

the reporting period
• Acquired for continuing use within the business with a

Current view to earning income or making profit from its use

• Not acquired for resale

Assets
• Examples; Land & building, plant & machinery, motor
vehicles, fixtures and fittings, goodwill

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10
 Liabilities
Present obligations

Probable future sacrifices of

economic benefits arising
from present obligations to
transfer assets or provide
services to other entities in
the future as a result of past
transactions or events

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 Classification of Liabilities
• Liability that is required to be settled in not
Current more than a year after the reporting period
• Examples; Trade payables/creditors, accounts
liability payable/accruals, bank overdraft, short-term
loans etc…

Non- • Liability that is required to be settled in more

than a year after the reporting period
current • Examples; Long-term loan, debentures, bonds
(issued)
liability
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 Equity or Net assets
Stated Capital
(Share Capital)

Owners contribution to the

business in the form of
assets, cash or other forms
of contribution.
The residual interest in
assets of the business after
deducting all its liabilities. Inco
er Surp me
O t h (Ret lus
r ves Earn ained
rese ings
)
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 Income

Occur in the
form of
Increases in • Increase in assets
economic • Reduction in
benefits which liabilities
result in increase
in equity
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 Classification of Income
• From delivering or producing goods,
rendering services, or other
Revenue activities that constitute the entity’s
ongoing major or central operations

• From peripheral or incidental

Gains transactions of an entity

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 Expenses
Occur in the form of
• Outflows or depletions of
assets
• Incurrences of liabilities
Expenses are
decreases in
economic benefits
that result in
decreases in equity

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 Expenses and Losses
• Expenses and Losses lead to decrease in
economic benefits that result in decreases in
equity.
• However;
– Expenses arise in the course of ordinary activities of a
business

– Losses arise from peripheral activities

• recognition criteria
• Bases of measurements
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 Recognition and Measurement
of Elements in Financial Statements

Godfred, Edem & Rita UGBS Slide 18

 Recognition

What is meant by “recognition”?

The process of including in the financial
statement an item that meets the
definition of an element of financial
statement and the fundamental
recognition criteria

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 Fundamental Recognition Criteria
• For an element to be recognized in the
financial statement, it must meet the
fundamental recognition criteria;
– Definition
– Measurability
– Relevance
– Reliability

Godfred, Edem & Rita UGBS Slide 20

 Fundamental Recognition Criteria
• Definitions
– The item meets the definition of an element of financial
statements.
• Measurability
– The item has a relevant attribute measurable with sufficient
reliability
• Relevance
– The information about it is capable of making a difference in
user decisions
• Reliability
– The information about it is representationally faithful,
verifiable, and neutral
Godfred, Edem & Rita UGBS 21
 Recognition of Elements
• Asset
– Probable that future economic benefits will flow to the
enterprise
– Item has cost or value that can be measured reliably

• Liability
– Probable outflow of resources embodying economic
benefits from the settlement of obligation
– Amount to be settled can be measured reliably

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 Recognition of Elements
• Income
– When increase in future economic benefits related to an
increase in an asset or a decrease of a liability has arisen
and can be measured reliably

• Expense
– When decrease in future economic benefits related to a
decrease in an asset or an increase of a liability has arisen
and can be measured reliably

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 Measurement

What does “measurement” mean?

Putting monetary amount on an element

of financial statement

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 Bases of measurement
• Based on acquisition cost or the original cost
Historical Cost
of the item

Current •Based on the cost that will be incurred in

(Replacement) acquiring a similar item on the market in its
value current state

Net Realizable •Based on the net amount that would be

(Settlement)
realized in the event of disposing off the item
Value
Present •Based on the discounted future cash flows
(Discounted)
associated with the usage of the item.
Value
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 DOUBLE ENTRY AND ACCOUNTING
EQUATION

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 Accounting Equation
• Financial accounting is based upon a simple idea
known as Accounting Equation

Claims over
Resources of the
a business resources of
the business

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27
 Accounting Equation

Assets Liabilities

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 Accounting Equation

Equity
Assets (Owner’s
Equity)

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 Accounting Equation

Equity
Assets (Owner’s Liabilities
Equity)

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 Effects of Transactions on Accounting
Equation

Identify the items Determine whether the

item is an asset, a
involved in the liability or capital
transactions (owner’s equity)

Determine whether the

Explain the effect of the
item has increased or
transaction on the
decreased as a result of
accounting equation
the transaction

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 CHANGES IN COMPONENTS OF
ACCOUNTING EQUATION

ASSETS

Causes of
Changes
EQUITY LIABILITIES

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 Double Entry Principle
• All transactions affect two items.
• Accounting shows the effect of the transactions on the
two items by:
a debit entry (left of a/c)
a credit entry (right of a/c)
• Each transaction must have a debit and corresponding
credit entry

A Debit Entry
A Credit Entry
33
Godfred, Edem & Rita UGBS
 Double Entry Principles Summarized

Accounts To record Entry in account

Asset Increase Debit
Decrease Credit

Expense Increase Debit

Decrease Credit

Liability Increase Credit

Decrease Debit

Equity Increase Credit

Decrease Debit

Revenue Increase Credit

Decrease Debit

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 End of Session Questions
• What are the elements of financial statements?
• Show how each of the following transactions can
affect the accounting equation (Statement of
Financial Position)
– Purchased goods on credit GH¢250,000 from Adwoa
– Paid rent expenses for last month with cheque GH¢250
– Sold goods costing GH¢50,000 on credit GH¢ 90,000 to
Anas
– Returned goods GH¢25,000 to Adwoa a trade payable

Godfred, Edem & Rita UGBS Slide 35