ACC124 WEEK 1-3 ULO D equal to the fair value of the asset given or fair

value of the asset received, whichever is clearly

• Elements of financial statements. This refers
evident. In the absence of fair value, the cost is
to the quantitative information reported in the
equal to the carrying amount of the asset given.
statement of financial position and income
statement. B. LIABILITY RECOGNITION PRINCIPLE
The ELEMENTS directly related to the LIABILITY – a present obligation arising from
measurement of FINANCIAL POSITION in the past events the settlement of which is expected
statement of financial position are: to result in an outflow from the entity of resources
embodying economic benefits.
a. ASSET
2 conditions that must be present for the
b. LIABILITY
recognition of a liability
c. EQUITY
1. It is probable that an outflow of economic
The ELEMENTS directly related to the benefits will be required for the settlement of a
measurement of FINANCIAL PERFORMANCE
present obligation.
in the income statement are:
2. The amount of obligation can be measured
a. INCOME
reliably.
b. EXPENSE
Obligations may be legally enforceable as
EQUITY is the residual interest in the a consequence of a binding contract or statutory
assets of the entity after deducting all of the requirement.
liabilities. Constructive obligations arise from
normal business practice, custom and a desire to
RECOGNITION OF ELEMENTS maintain good business relations or act in an
Recognition means the reporting of an equitable manner.
asset, liability, Income or expense in the face Ways to settle present obligations
of the financial statements of an entity.
A. payment of cash
A. ASSET RECOGNITION PRINCIPLE
B. transfer of noncash assets
ASSET – a resource controlled by the entity
as a result of past events and from which future C. provision of services
economic benefits are expected to flow to the
D. replacement of the obligation with another
entity.
obligation
2 conditions that must be present for the
E. conversion of the obligation into equity
recognition of an asset
C. INCOME RECOGNITION PRINCIPLE -
1. It is probable that future economic benefits will
Income shall be recognized when earned.
flow to the entity.
INCOME – increase in economic benefit
2. The cost or value of the asset can be
during the accounting period in the form of
measured reliably.
inflow or increase in asset or decrease in liability
Future economic benefit that results in increase in equity, other than
contribution from equity participants.
The future economic benefit embodied in
an asset is the potential to contribute directly or REVENUE – arises in the course of ordinary
indirectly to the flow of cash and noncash regular activities and is referred to by a variety
equivalents to the entity. of different names including sales, fees, interest,
dividends, royalties and rent.
Cost principle
GAINS – represent other items that meet the
Asset should be recorded initially at definition of income and do not arise in the
original acquisition cost. In a cash transaction, course of the ordinary regular activities.
cost is equivalent to the cash payment. In a
noncash or an exchange transaction, the cost is
2 conditions that must be present for the construction contract shall be recognized as
recognition of income revenue and expenses, respectively, by
reference to the stage of completion of the
1. It is probable that future economic benefits will
contract activity.
flow to the entity as a result of an increase in an
asset or a decrease I a liability. 5. Production method
2. The economic benefits can be measured Revenue is recognized at the point of
reliably. production
Point of sale Other income recognition
The two conditions for income recognition  Interest revenue- Recognized on a time
are present at the point of sale. Point of sale is proportion basis that takes into account
the point of income recognition. the effective yield of the asset
 Royalties- Recognized in an accrual
Revenue from sale of goods
basis in accordance with the substance of
The following conditions should be the relevant agreement.
present for the revenue from sale of goods  Dividends- Recognized when the
shareholder’s right to receive payment is
A. The entity has transferred to the buyer the
established, when dividends are declared.
significant risks and rewards of ownership of the
 Installation fees- Recognized over the
goods.
period of installation by reference to the
B. the entity retains neither continuing managerial stage of completion.
involvement nor effective control over the goods  Subscription revenue- Recognized on a
sold. straight-line basis over the subscription
period.
C. the amount of revenue can be measured
 Admission fees- Recognized when the
reliably.
event takes place.
D. it is probable that economic benefits  Tuition fees- Recognized over the period
associated with the transaction will flow to the in which tuition is provided.
entity.
D. EXPENSE RECOGNITION PRINCIPLE -
E. the costs incurred or to be incurred in respect Expenses are recognized when incurred.
of the transaction can be measured reliably.
EXPENSE - Decrease in economic benefit
Exceptions to the point of sale during the accounting period in the form of an
outflow or decrease in asset or increase in
1. Installment method liability that result in decrease in equity, other
Revenue is recognized at the point of than distribution to equity participants.
collection. Expenses that arise in the course of ordinary
AMT OF REVENUE = GROSS PROFIT RTE x regular activities include cost of sales, wages
AMOUNT OF COLLECTION and depreciation.
2. Cost recovery method or sunk cost LOSSESS do not arise in the course of
method ordinary regular activities and include losses
Revenue is recognized at the point of resulting from disasters
collection. Conceptual framework: expenses are incurred
3. Cash method when it is probable that a decrease in future
economic benefits related to decrease in an asset
Revenue is recognized when received or an increase in liability has occurred and that
regardless of when earned. the decrease in economic benefits can be
measured reliably.
4. Percentage of completion method
2 conditions that must be present for the
When the outcome of a construction
recognition of income
contract can be estimated reliably, contract
revenue and contract costs associated with the
1. It is probable that a decrease in future - The amount of cash or cash equivalent that
economic benefits has occurred as a result of a could currently be obtained by selling the asset in
decrease in an asset or an increase in a liability. an orderly disposal.
2. The decrease in economic benefits can be E. Present value or future exchange price
measured reliably.
- The discounted value of the future net cash
Matching principle inflows that the asset is expected to generate in
the normal course of business.
Those costs and expenses incurred in
earning a revenue shall be reported in the same
period.
3 applications
1. Cause and effect association- Expense is
recognized when revenue is recognized.
2. Systematic and rational allocation- Some
costs are expensed by simply allocating them
over the periods benefited.
3. Immediate recognition-The cost incurred is
expensed outright because uncertainty of future
economic benefits or difficulty of reliably
associating certain costs with future revenue.
An expense is recognized immediately when:
1. When an expenditure procedure produces no
future economic benefit.
2. When cost incurred does not qualify or ceases
to qualify for recognition as an asset.
MEASUREMENT OF ELEMENTS
Measurement is the process of
determining the monetary amounts at which the
elements of the financial statements are to be
recognized and carried in the statement of
financial position and income statement.
Measurement bases
A. Historical cost or past purchase exchange
price
- The amount of cash or cash equivalent paid or
the fair value of the consideration given to acquire
an asset at the time of acquisition.
B. Current cost or current purchase exchange
price
- The amount of cash or cash equivalent that
would have to be paid if the same or equivalent
asset was acquired currently.
C. Realizable value or current sale exchange
price