Financial Statement Elements
Obligation to transfer cash or other resources as a result of a past transaction.
What is a liability?
Information is useful in predicting the future.
What is predictive value?
The life of an enterprise can be divided into artificial time periods.
Periodicity assumption
Purchase office supplies on account for $500.
Debit supplies 500; credit A/P 500
A three-year fire insurance policy was purchased on July 1, 2024, for $6,000. The company debited prepaid insurance for the entire amount at the time of payment.
Debit Insurance Exp. 1,000; Credit prepaid insurance 1,000
Inflow of an asset from providing a good or service.
What is revenue?
The two fundamental qualitative characteristics
What is relevance and faithful representation?
Concerns the relative size of an item and its effect on decisions.
Materiality
Provide services to customers and receive cash of $8,000.
Debit cash 8,000; credit service revenue 8,000
Depreciation on equipment totaled $5,000 for the year.
Debit Depreciation Exp. 5,000; Credit accumulated depreciation 5,000
An item owned by the company representing probable future benefits.
What is an asset?
Information is available prior to the decision.
What is timeliness?
The entity will continue indefinitely.
Going concern assumption
Purchase equipment in exchange for cash of $24,000.
Debit Equip. 24,000; Credit cash 24,000
On November 1, 2024, the company borrowed $200,000 from a bank. The note requires principal and interest at 12% to be paid on April 30, 2025.
Debit Interest Expense 4,000; Credit Interest Payable 4,000
Outflow of an asset related to the production of revenue.
What is an expense?
Information confirms expectations.
What is confirmatory value?
The enterprise is separate from its owners and other entities.
Economic entity assumption
Pay employee salaries of $1,000 for the current month.
Debit salary exp. 1,000; credit cash 1,000
Employee salaries of $8,000 for the month of December will be paid in early January 2025.
Debit salary exp. 8,000; Credit salary payable 8,000
Sale of an asset used in the operations of a business for less than the asset’s book value.
What is loss?
Implies consensus among different measurers.
What is verifiability?
All information that could affect decisions should be reported.
Full disclosure principle
Pay the current month's rent of $3,000.
Rent was paid for the next year on October 1, 2024 for $15,000. The company debited prepaid rent for the entire amount at the time of payment.
Debit Rent exp. 3750; credit prepaid rent 3750