We meet again my old friend “Financial Accounting”. One class I always look forward to is the Corporate Financial Accounting class. I have learnt a lot even as a consultant and I am still amazed as to how the facilitator is able to accommodate those that did not even have a financial background. However, we have finally gotten to the part of the curriculum that I am very happy about – Financial statement Preparation. The presentation of financial statement is guided by the IAS 1 (international accounting standard 1). The IAS 1 documents the overall requirements for financial statements, including how they should be structured, the minimum requirements for their content and overriding concepts such as going concern, the accrual basis of accounting and the current/non-current distinction. The standard requires a complete set of financial statements to comprise a statement of financial position, a statement of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows.
However, we have been able to discuss in class how presenting the financial statement should be. It is pertinent to know that every transaction that must be presented would be an “element to the financial statement”. In addition, before any transaction is recorded in the financial statement it must be classified under the element of the financial statement. We have 5 elements of the financial statement. Namely:
- Asset
According to financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can be converted into cash (although cash itself is also considered an asset). In simple terms, Asset are resources you can control. Asset are classified as non-current asset and current asset. Non-current asset is long -term asset that is, they have a useful life of more than a year. Examples of non-current asset are; Motor-vehicle, Equipment, plant and machinery, etc. While current asset refers to any asset which can reasonably be expected to be sold, consumed, or exhausted through the normal operations of a business within the current fiscal year or operating cycle or financial year. For example; cash and cash equivalent, inventory, account receivables, etc.
- Expenses
According to conceptual framework by the International Accounting Standard, expenses refer to decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. For example, normal business expenses are rental expenses, utility expenses etc.
- Income
Income is 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. E.g., interest income, profit on sales of asset e,t,c
- Liability
This is recognized in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. Example are trade payables Paye payables etc.
- Equity
Equity is the residual interest in the assets of the entity after deducting all its liabilities
In conclusion preparation of financial statement is based on ONLY these 5-element enumerated above. Asset and Expenses are naturally debit in nature, also, income, equity and liability have a naturally credit transaction.
In addition, the basic rule as discussed in class is that “EVERY DEBIT ENTRY MUST HAVE A CORRESPONDING CREDIT ENTRY”. Now that we know the treatment of the element in the financial statement, increasing and decreasing these amounts based on the transaction that occurred follows the same principle. Although this phenomenon might be complex for non-accounting student, I remain impressed with how determined the students are willing to learn it at all cost, at it encourages me to help my classmate as much as I can
Reflections from Learnings; Financial Accounting Transactions Recording.