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ACC10007 Topic 2 Part 1 Lecture recording — Transcript

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0:11okay
0:15the recording has started
0:18i hope okay
0:20um
0:21all right
0:22so let me uh get on uh with this
0:25topic too
0:27part one which is called
0:29recording
0:30and reporting business transactions
0:33uh using accrual accounting
0:36and we're going to concentrate on this
0:38thing called financial position uh today
0:42all right so there are a few things uh
0:44in this uh
0:46title
0:47right we are going to learn how to
0:48record and report
0:52uh
0:52things that happen
0:54okay um which we call
0:57transactions
0:58transactions are basically
1:00economic
1:01activities what do we mean by economic
1:03activities we mean
1:06things that happen
1:07in the organization that involve
1:10money
1:11meaning dollars and cents right because
1:15if things uh happen the events happen
1:18and uh
1:20they do not involve dollars and cents or
1:24they do involve dollars and cents but we
1:27don't know how much to record then we
1:30are not
1:36those business transactions so we want
1:38to learn how to do it
1:40right now
1:42uh the way that we are
1:45going to record it
1:46is called the accrual accounting
1:52method
1:53okay there is another way uh but we are
1:56not gonna use that way but i'll
1:58introduce it to you
1:59uh at some point later on but we're
2:02gonna concentrate on this thing which we
2:03call accrual accounting and
2:06lastly
2:08we are focusing
2:10here
2:11on the financial position so this means
2:14that
2:15we want to describe what is going on in
2:19the organization at one particular point
2:22of time so
2:24at that moment
2:28what is the situation so we call it the
2:30financial position right
2:36so uh what we'll do
2:38for starters and this is the usual thing
2:41that we're going to do
2:42we're going to link the topic to the
2:45unit learning outcomes
2:47right so after successfully completing
2:50uh topic two part one which is the one
2:53today
2:54you should be able to first of all
2:57discuss
2:58and evaluate the role that financial
3:00information plays
3:01in practice within an environment of
3:04business decision making which is
3:07the first
3:08unit learning outcome
3:12but in addition to that
3:14we are going to apply accounting tools
3:17to prepare financial reports
3:20for both external and internal business
3:23use so this one here the uo number two
3:26is the additional
3:29unit learning outcome
3:31which we will introduce
3:33from this
3:35topic
3:36onwards
3:37okay
3:41in terms of the specific things
3:44that we want to be able to do for this
3:47topic
3:48so after uh studying topic two part one
3:52you should be able to first of all
3:55um
3:56describe the characteristics of business
3:59transactions
4:01um so
4:02what makes
4:04a business transaction we need to find
4:06out about this business transactions
4:08first before we can even record the
4:10thing right
4:11um
4:13next
4:14is to differentiate
4:16between a business transaction
4:19the one that we can record
4:22a personal transaction which we are not
4:25going to record in the
4:29business accounts
4:32and
4:33a business event
4:35which is something related to the
4:38business but for some reason
4:40we are still not able to record it
4:44in the business account so the one that
4:47we can actually
4:49record
4:50would be the business
4:53transaction right it has got to do
4:56something with with business and it has
4:58got to be a transaction
5:01okay yeah so we will learn what makes
5:04the difference between these three
5:05things
5:07and
5:07the next uh thing that we want to be
5:09able to do is to explain
5:11the accounting equation and the double
5:14entry system of
5:15recording
5:17so
5:18we introduce this thing
5:21called the accounting equation
5:24and
5:25we get introduced also to the idea of
5:28this thing called double entry system of
5:30recording
5:32um
5:33yeah okay
5:34the next one
5:36is to identify
5:38the impact of business transactions on
5:40the accounting equation so um
5:43what this actually means is that when
5:45you have business transactions uh it is
5:49going to have
5:50an effect on
5:52the accounting equation so we'll learn
5:55how
5:56these
5:57transactions
5:59affect the accounting equation
6:04some other
6:05objectives we
6:07learn how to prepare an accounting
6:09worksheet
6:11and
6:12a statement of financial position so
6:14this is the first statement
6:17that we're going to learn how to do
6:20right
6:22the next one is to
6:23identify the financial reporting
6:26obligations of
6:28an entity
6:29in other words
6:30if you've got an organization which
6:32sometimes you call it an entity
6:34what do they actually uh need to
6:38do for reporting they've got they've got
6:40to prepare reports what are their
6:43obligations what are their
6:44responsibilities to do this reporting
6:46okay the next objective is to explain
6:50the nature and
6:54purpose of the statement of financial
6:57position so we learn how to prepare it
7:00and we want to know a little bit more
7:02what why do we
7:04prepare it what use
7:13okay the next thing is to apply the
7:16asset definition criteria we learned
7:19about assets
7:21last week we want to learn a little bit
7:23more about
7:24this
7:25asset and the same thing with
7:27liabilities as well
7:30and then we will discuss the definition
7:32and nature of
7:34equity
7:35remember
7:37uh in
7:38last week's session
7:40we say that the things that that get
7:42recorded in the statement of financial
7:44position are the asset items the
7:47liability items and the equity items
7:52because the other two
7:55the income items and the expenses items
7:57they are not recorded in the statement
8:00of financial position in fact they are
8:03recorded in the statement of
8:04comprehensive income which we will look
8:06at
8:07later okay
8:10we will also describe the format
8:12and the presentation of the statement of
8:15financial position in other words how do
8:17we
8:18um
8:20do it
8:22okay
8:23how do we how do we actually prepare the
8:24statement stigma financial position the
8:26next objective
8:28is to describe the presentation and
8:30disclosure requirements for the elements
8:34in the statement of financial position
8:36so
8:37when we say elements in the statement of
8:39financial position what are we talking
8:41about we are talking about the assets
8:44the liabilities and the equity items
8:47right
8:49an additional
8:52objective uh is to explain
8:55the accounting conventions and doctrines
8:59governing the recording of transactions
9:01in accounting practice
9:03so uh i put this in here because i think
9:07it is important
9:09um when we are
9:11studying how to do accounts
9:13that we are knowledgeable about certain
9:16uh principles certain
9:18things that we do normally right
9:21which we call
9:22uh conventions or doctrines
9:25that guide us on how we actually record
9:28those transactions in the accounts
9:32and finally we look at
9:37the limitations of the statement of
9:39financial position something that we
9:41need to be aware of
9:43uh when we actually do have a statement
9:45of
9:46financial position we prepare the
9:47statement of financial
9:48position um
9:51but
9:53it may not tell us
9:56certain things
9:58um
9:59yeah so so there's there are some
10:00limitations
10:02and the way that the things in the
10:05statement of financial position are
10:08uh being prepared okay there are also
10:11some limitations on it
10:13um so
10:15i would like us to be aware of these
10:18things as well
10:22so those are the learning objectives
10:25in this
10:26topic two
10:27part one
10:30so first of all
10:33we go back
10:34and talk about
10:37business transactions what
10:40is it actually
10:43business transactions
10:45are events
10:48that affect the assets liabilities and
10:50equity items
10:52in the entity
10:54okay so if you have a business
10:56transaction somehow
10:58it is supposed to
11:00have an effect on
11:02one or more of these three items right
11:07assets
11:09and or liabilities and or equity items
11:13okay yeah
11:15and
11:17when you have a business transaction and
11:19you want to record it
11:20okay
11:21a business transaction is recorded we're
11:24going to record it in the accounts
11:27when it can be
11:29reliably measured
11:32in monetary or in other words uh dollar
11:36value terms
11:38okay so um
11:41if you
11:42are able to
11:44find out how much
11:46is that business transaction
11:49and you're quite sure that that is the
11:51amount then
11:53you can record it
11:55in the accounts
11:56now
11:57for student purposes right
11:59for our purposes
12:01um
12:04by and large the transactions will be
12:05given to you the amounts will be given
12:07to you so all you need to do is to look
12:10at the question the amounts are there
12:11and we record it but in real life
12:16you need to find out the amount right so
12:19sometimes
12:22you can find out the amount most of the
12:24times you can find the amount then you
12:25can record it in the accounts but
12:27sometimes
12:32amount so you have to choose the more
12:36appropriate amount
12:38this is when
12:40it's in real life all right so that's
12:42why they actually uh mention it over
12:44here when you can reliably measure it
12:47right now
12:49under the accounting entity concept
12:52every
12:54business entity or organization if you
12:56like
13:02separate from
13:07um
13:08what this simply means is that
13:11if you
13:13have a business right
13:15uh you must keep the things
13:20separate from
13:22the things which
13:28personal
13:30owners
13:31um
13:33transactions
13:35recorded in
13:36the business
13:38accounts right so we keep the business
13:40transactions separate
13:54so um
14:01[Music]
14:02contribution of capital by the owners
14:04remember the owners and the
14:08business are separate things
14:15contribute some money
14:40yes it is the business that's actually
14:42paying the wages right not the owner
14:46okay so payment of wages in this sense
14:49is
14:53of bank interest when
14:55the business
15:18okay back on
15:20um receipt of bank interest
15:23the business bank interest where it is a
15:26business transaction
15:33yeah it's a bit of a lagging uh yeah a
15:36little bit of lagging okay but it it it
15:39comes
15:40on again so
15:42yeah
15:43okay yeah
15:46it's recorded so
15:48hopefully that's fine
15:50okay um
15:52payment of gst and other taxes now it is
15:55the business that actually pays this
15:57gst and other taxes
15:59gst
16:00stands for goods and services tax
16:03okay um
16:04yeah
16:06that's a business transaction as long as
16:08it is the business taxes right now
16:12if the business pays uh accounts payable
16:15this thing accounts payable as amounts
16:17owing to the suppliers
16:20okay then it is a business transaction
16:23okay
16:25uh depreciating
16:27office equipment
16:30um
16:30the business has got some office
16:32equipment like tables and chairs
16:35computers
16:36and
16:38the longer they are being used their
16:40value actually decreases because they
16:41get older they're used they're not as
16:43effective as before so
16:46the process of reducing the value is
16:48called depreciation so if you are going
16:51to depreciate this office equipment
16:53because this office equipment belongs to
16:55the business then it is a business
16:58transaction
16:59sale of goods to customer now
17:03who sells goods to customers is it the
17:06business selling the goods to the
17:07customer or is it the owner selling the
17:09goods to the customer
17:11it is
17:13the business selling the goods to the
17:15customer all right we are not talking
17:17about the owner here so that's why it is
17:19a business transaction
17:21okay
17:22uh if the business provides services to
17:24the client
17:26or customer if you like
17:28then
17:29we can record it because it is a
17:30business transaction there is sort of a
17:33sale going on right okay so these are
17:36examples
17:37of business transactions it is not 100
17:41complete list
17:42i'm just giving you some examples
17:47okay some more uh purchasing accounting
17:50software so if the business
17:52bought some software maybe it's an
17:55accounting software maybe it's some
17:56other types of computer software right
17:59but for business use then it's a
18:01business transaction
18:03the next one
18:05um withdrawal of capital
18:08okay so this one what does it mean
18:11the owner
18:14takes back some of the capital
18:17that he has previously put into the
18:19business so it's the opposite of
18:21contribution of capital
18:23right it's opposite of this one here
18:26contribution of capital you put in the
18:28owner puts in the money into the
18:30business
18:31the uh opposite
18:33which is withdrawal of capital
18:35the owner takes out some money which was
18:37previously put into the business okay
18:40yeah
18:40uh so as far as the business is
18:42concerned they are paying back some of
18:45the capital back to the owner so it is a
18:48business transaction
18:50repayment of loan to the bank
18:54if it is a
18:55business loan
18:57right
18:58the business needs to pay back that loan
19:00to the bank it is a business transaction
19:05cash purchases of office supplies right
19:08these office supplies
19:11belong to the business
19:13then they are going to
19:14buy it
19:16okay then it is a business transaction
19:19payment uh of advertising maybe the
19:21business wants to do some advertising
19:23they got to pay for it right so it is
19:27a business transaction so these are
19:29these are
19:35now how about personal transactions
19:41personal transactions of the owners or
19:43the partners if it is a partnership or
19:46the shareholders if it is a company now
19:49these are personal transactions
19:52right they've got nothing to do with the
19:54business
19:54or the organization
19:57all right
19:58so
19:58what should we do with personal
20:00transactions personal transactions are
20:01unrelated to the operation of the
20:05business so we don't record it
20:08except for
20:10this is the exception huh
20:12except for drawings of capital and
20:16contributions of capital
20:18now um
20:22if the owner
20:23contributes money to the business
20:27right so it affects the owner because
20:28the owner is paying some money so the
20:30personal money of the owner is less
20:33but the
20:34business money gets more right okay
20:48if it is a drawing
20:51right if it's a drawing of capital it's
20:53the opposite that means um
20:56the owners
20:58uh take back some of the capital from
21:00the business so
21:01from the point of view of the owner the
21:04owner gets
21:05more money now
21:07all right but from the business point of
21:08view the business has got less money
21:10because the capital decreases right so
21:12we record that part the decrease in the
21:16capital
21:27let's look at business events
21:29okay
21:31these are
21:36but they are not recorded
21:39as business
21:44liabilities and equity items in an
21:47entity okay i give you a
21:50an example of a business event
21:53that does not actually affect
21:56any asset or liability items or equity
21:58items okay
22:01things happen
22:03um
22:05you know
22:06from the morning time
22:08until the late afternoon time so these
22:10are business hours right so
22:12if you're doing
22:14things like selling to customer or
22:16buying some things from the supplier
22:19okay so these are
22:22business transactions but
22:24there are other things that go on
22:27uh in the organization for example
22:30um
22:32if
22:34they happen to interview
22:36a potential worker
22:38right is this something to do with the
22:41business yes all right not because
22:43they're interviewing
22:44uh
22:46a a potential employee right
22:49it has got
22:51related to is related to something you
22:54know that will normally happen as part
22:56of the business activities
22:58but is it recorded it is not recorded
23:01because no cash is flowing out no cash
23:04is coming in
23:06we just know that it happens but
23:08it's not a business transaction it is
23:11actually a business event
23:14right so um
23:17if there are things that happen in the
23:18business and you cannot put a dollar
23:20amount to it
23:22okay or
23:25you know for some other reason it
23:26doesn't affect the effort uh the assets
23:28liabilities and equity items
23:30in an entity then
23:32it's an event
23:34and it's not uh a transaction so it
23:37doesn't get recorded in the accounts
23:41the next thing that we will
23:44uh look at
23:45is this thing called the accounting
23:48equation all right so i give you the
23:51equation first and then i explain why it
23:53is like that
23:55yeah
23:56the equation is
23:57assets equals to liabilities plus equity
24:02right
24:03uh it in short
24:05uh a for assets equals to l for
24:08liabilities plus e for equity
24:11right
24:12so
24:14uh assets uh
24:18the things that
24:21is owned or at least it's controlled
24:25by the entity
24:28or the organization
24:30and the total value of those things
24:34that's the value of the assets the total
24:36value of the asset okay
24:38liabilities
24:40they are external sources of funds in
24:43other words
24:44the amount that the organization owes to
24:48outsiders
24:51the amount that the organization
24:53is owing to outsiders right external
24:57parties so these are liabilities what is
25:00the
25:01business owing money to outsiders anyway
25:03give you some classic examples the
25:05business bought some things from the
25:07supplier on credit there's a credit
25:09transaction they haven't
25:11paid to them yet so it is a liability
25:14all right another classic example
25:17um
25:18the business
25:20um
25:22got a bank loan
25:24right so the business owes money to the
25:26bank
25:27right now their business has not yet
25:29paid to the bank so it is a liability so
25:33these are
25:34money that is owing to outsiders
25:38equity are internal sources of funds
25:40from the owners so in other words
25:43uh the amount of contribution
25:46that is from the owners
25:48right now not
25:51to the outsiders
25:52okay
25:54so uh the rational of the accounting
25:57equation is
25:59the assets whatever that the business
26:01has got which are the assets you total
26:03up the value of what the business has
26:06got
26:07the total is only one figure right
26:10a total it's only one figure isn't it
26:13the total value of all the assets you're
26:15going to end up with one figure
26:18will be equal to
26:21uh the total value that the basis is
26:25owing
26:26to outsiders which we call lenders
26:30as well as
26:32what the business
26:34can actually
26:35pay back to the owners
26:39all right so if you think about it
26:43hopefully it starts to make sense but it
26:45only makes sense
26:47if you are aware or very aware
26:50that uh the business and the owners are
26:55separate things okay so
26:58let me uh explain it in another way
27:01whatever that the business has got must
27:04have come from somewhere right
27:06it doesn't appear magically whatever the
27:09business has got which are asset must
27:11either
27:12come from the owner
27:14or
27:15if it doesn't come from the owner it
27:17must be funded by amount owing to the
27:20supplier
27:21right so that is why it is equal to the
27:24total value owing to outsiders plus
27:27whatever
27:29uh left over
27:30that can be distributed back to the
27:32owner if the business wishes to do so
27:37right
27:38but um
27:39typically
27:42a normal functioning
27:45business
27:46will not
27:47pay back all the money to the owner
27:49because they want to keep some of the
27:50money uh in the business themselves
27:53because they want to
27:55uh use it for normal business operations
27:58and they may also want to expand so they
28:01might pay back some of the money to the
28:02owner in terms of profits right but
28:05normally they don't pay all
28:07right
28:08unless
28:10the only time when they pay back
28:11everything back to the owner
28:13is you know when
28:15it's when the business is closing
28:18when the business closes there's not
28:19going to be any more organization
28:21everything goes back to the owner
28:24all right
28:25okay but normally
28:28uh
28:29we
28:30hope that the business doesn't close so
28:31sooner
28:33okay
28:34so let's have uh an example over here
28:38okay
28:39you got
28:40valerie's versus
28:43um
28:45this is the name of the business okay
28:48this is not
28:50the name of the owner so valerie's
28:52versus
28:54needs 350 000 of assets to do business
28:57right
28:58okay now valerie now this one here
29:01valerie is the name of the owner
29:05okay so do not get confused uh valerie's
29:08buses is the business valerie is the
29:10owner there are two different things
29:13valerie only has 200 000 dollars to
29:15contribute as equity
29:18right
29:18so
29:19what happens the business needs 350 000
29:23valerie the owner has only got 200 000
29:25so what happened
29:27the business needs to borrow additional
29:29funds of 150 000 from a bank right
29:34okay and it will be a liability of the
29:37business
29:38right so for the business account
29:42um
29:43the total value of the assets okay it's
29:45got 350 000
29:46assuming that the loan was
29:48obtained right
29:50total 250 000
29:52of which uh
29:54uh the business knows that it's got to
29:56pay back 150 000 to the bank at some
29:59point in the future
30:02right
30:03and whatever that's left over at this
30:05point of time
30:08yeah it can be paid back
30:10to valerie the owner 200 000
30:14right so this is the effect
30:16of this situation or the accounting
30:19equation
30:23now uh let me introduce to you before we
30:26continue further
30:27uh let's be introduced to the concept of
30:31duality
30:33right so what does this mean
30:35the accounting equation must be kept in
30:38balance after a transaction is entered
30:42in other words the accounting equation
30:44which is asset
30:45equals to liability plus equity will
30:47always be the case after every
30:51transaction
30:52and
30:53we need to make sure
30:56that this is actually
30:58happening
30:59every time we enter a transaction
31:02into our
31:05our work later on okay we're going to
31:06use a worksheet
31:08okay and uh yeah
31:10so in order to keep this equation which
31:13is asset equals the liabilities plus
31:14equity in balance
31:17then a transaction must be recorded in
31:20at least two places correct or not if
31:22you record it only in one place then
31:24it's not balancing
31:27okay you must record at least two places
31:29for it to balance
31:31did i say at least two places yes
31:34sometimes it can affect more than two
31:36places it can be three it can be four
31:39but for our purposes
31:41most of the time it will affect two
31:43places we want to keep things as simple
31:45as possible but you do come across
31:48occasionally
31:50maybe more than more than two places all
31:53right but most of the time it's two
31:55places for our purposes
31:59okay um so let's have a look the concept
32:02of uh duality
32:05uh example here
32:07okay the purchase of a
32:09delivery truck
32:12via or using a loan that means uh the
32:14business is buying a truck
32:17so
32:19a truck
32:21becomes an asset to the business the
32:24truck is the actual thing that the
32:25business buying
32:26the category
32:28is
32:29asset okay
32:35at first there was no truck so now there
32:36is a truck
32:37right
32:38um
32:39now think about it where did the
32:42business get the money to buy the truck
32:45so in this case here they say it's from
32:48a loan
32:50a loan is money owing to the bank so
32:53you're creating
32:56an amount of money that is owing to the
32:58bank but the bank is external right so
33:01it is a liability
33:02it's not
33:04um
33:05an equity item okay so the liability
33:08which is called a loan
33:11increases
33:12and
33:13for this particular transaction it has
33:15got no effect on
33:18equity
33:19so
33:20asset increases liability increases by
33:22the same amount so can you imagine
33:25that both sides
33:27of the
33:28of the equation
33:30gets higher by the same amount so the
33:33total
33:34will be equal on both sides
33:38okay
33:40now we expand the account
34:19okay let me repeat
34:21okay remember we mentioned that um
34:25income
34:26and expenses they get recorded in the
34:28statement of comprehensive income right
34:30um
34:32but they also affect equity
34:34okay if you've got an income item it
34:37will increase equity if you're gonna
34:39expense item it will decrease equity but
34:41equity
34:42is recorded in the statement of
34:44financial position right
34:47correct
34:48um
34:49so
34:51um
34:52yeah if you look at the
34:55definition
34:56of income and expenses from topic one
34:59right
35:00if you've got income equity increases if
35:03you get expenses equity decreases so it
35:06does actually affect
35:08the statement of financial position as
35:10well
35:11in addition to the statement of
35:12comprehensive income okay
35:15so
35:16uh
35:17therefore
35:19profit or loss
35:21okay is added to or subtracted from the
35:24opening
35:26equity
35:27on the statement of financial position
35:30right so if you've got profit the equity
35:33will increase okay so if
35:36let's say for example here you've got
35:37assets equal to liability plus equity
35:39right so if
35:41you've got income items this
35:44income item will increase the equity
35:47okay and any expenses item would reduce
35:49the equity you can see reduce right
35:51because we've got the minus expenses so
35:52it will reduce the equity
35:54okay
35:55so profit is actually the income minus
35:58the expenses so hopefully if you've got
36:00income more than expenses you have a
36:02profit it will increase the equity
36:04but sometimes
36:05a business can make a loss so the
36:07expenses is more than the income
36:10so it will reduce the equity
36:16okay the next thing
36:18that we look at is um
36:21what we call transaction analysis it
36:24actually
36:25sounds
36:26more complicated than it really is i
36:29hope um
36:30[Music]
36:31it's it's not as complicated as it
36:33sounds in other words uh hopefully it's
36:35like that all right so what do we need
36:37to do
36:38read the transaction so for student
36:40purposes the transaction will be given
36:41to you so read it understand what's
36:44going on
36:45identify the nature of the transaction
36:47in other words you know try to
36:50figure out what is going on in the
36:52transaction
36:53given to you and then
36:56number three
36:57find out how that transaction which is
37:00described for you in the question is
37:03going to affect the accounting equation
37:06in terms of asset and or liabilities and
37:09or equity
37:11okay yeah
37:15so let's have an example
37:17we got example number one capital
37:19contribution okay so the owner
37:21contributes to twenty thousand
37:23dollars in cash to start a business so
37:28um
37:28you know what's going on roughly the
37:30owner
37:32puts has got some money the owner takes
37:3520 000 of his
37:38money and puts it into the business
37:41right so as far as the business is
37:42concerned the business has got 20 000.
37:46so this
37:47um
37:48the keywords here is cash
37:50okay because it says here the owner
37:52contributes uh cash so the business has
37:54got more cash now right cash increases
37:57by 20 000 but cashier
38:00is
38:01under asset category it is an asset
38:04right
38:05and then
38:07uh the owner increases the capital of
38:10the business so the capital
38:13uh which is under the
38:16category of equity
38:18increases so
38:20what is happening to the accounting
38:21equation you've got assets equals to
38:23liabilities plus equity cash increases
38:25by twenty thousand so assets increased
38:27by twenty thousand
38:30plus equals to liabilities no effect on
38:32liabilities
38:34plus the capital increases by 20 000
38:37capital is under the category of equity
38:39so
38:40uh both sides increase by 20 000 so the
38:43accounting equation is in balance it's
38:45balancing
38:46right
38:50next one
38:52uh there is a purchase of an asset using
38:55cash all right
38:56so
38:57the business purchases a new ipad for
39:00500 and pays by cash so
39:03uh they bought this uh electronic
39:05equipment okay uh using cash
39:08right
39:09so what happens to the cash of the
39:11business it drops by 500 right
39:15because they paid 500
39:17okay so cash decreases
39:20by 500 but remember cash is an asset so
39:23asset goes down by 500
39:26right okay and then
39:28you have got a new thing
39:30which is this thing a new ipad
39:34uh purchased right
39:36uh it belongs to the business the value
39:38is 500 so you got a new
39:40asset called
39:43the ipad it goes under the
39:46category we can call it office equipment
39:48because it is an equipment
39:50right and it's under the category of
39:52asset as well so if you've got any
39:53equipment it is under the category of
39:55assets so this one you look what
39:57happened huh
39:58the cash decreases by 500 so asset comes
40:02down by 500 and at the same time the
40:05value of this ipad which is office
40:07equipment goes up by 500 so asset goes
40:11up by 500
40:12so
40:13in this transaction it only affects the
40:16assets but assets drops by 500 and goes
40:18up by 500
40:20so it's two places right
40:22okay and then on the right side the
40:24liability and equity there's no effect
40:28in this particular equation but it is
40:30balancing right
40:32okay it's balancing
40:36okay let's have a look at example three
40:38so now there's uh the business sends a
40:41sales invoice
40:43um an invoice is actually a bill
40:45it's sending a bill to the customer why
40:47are we sending bill to the customer
40:49for
40:51providing tennis coaching services so
40:53the amount is three thousand okay so
40:56there's an amount over here
40:57so
40:59we've got a bill
41:01when we send a bill it's either you're
41:03doing a sale of something or you
41:06provided some services to a customer
41:08right
41:09so the keywords are invoice and services
41:13now has the customer paid or not
41:17so let's say that the customer has not
41:19yet paid okay so you do not get cash
41:22immediately so what happens is that the
41:24customer is owing money
41:28to the business now
41:29so
41:30as far as the business is concerned this
41:32is called accounts receivable right
41:36sometimes it is known as debtors so the
41:38amount that the customer owes
41:40is three thousand so previously you
41:42don't have accounts receivable now you
41:44have right it increases by three
41:46thousand accounts receivable by the way
41:50is under the category of asset
41:53all right
41:54um
41:55now you've got this other thing which is
41:58actually sales but in here we call it
42:00fees revenue you can do that
42:02okay
42:03the fees revenue increases by 3 000
42:07and it is an income item right so
42:11how do we
42:13uh present it in
42:15in accounting equation form
42:17so accounts receivable which is under
42:20the category of asset is 3000 it goes up
42:22by 3 000.
42:24this transaction has got no effect on
42:26liabilities
42:28okay income increases by 3 000 in the
42:32form of coaching fees so it goes up and
42:35income
42:36eventually will contribute to equity so
42:39both sides of the equation can you see
42:41here
42:42left side increases by 3000 and then on
42:44the right side it increases by 3000 as
42:46well so the equation is balancing
42:49okay
42:54right
42:55so the next thing okay we've given you
42:58some transactions uh for you to think
43:00about the next thing
43:02uh we're gonna introduce is called the
43:05worksheet
43:06for the accounting worksheet right the
43:08keyword is worksheet
43:10this uh worksheet summarizes uh the
43:13duality that we were talking about
43:15associated with each business
43:17transaction
43:19so
43:20all
43:21business transactions
43:23can be entered into the worksheet
43:25only business transactions are entered
43:27into the worksheet if
43:29for some reason
43:32in the question
43:33they gave you a business event
43:37or they gave you a personal transaction
43:40then do not record the personal
43:43transaction or the business event in the
43:46worksheet because then they are not
43:48supposed to be
43:50recorded in the worksheet only the
43:51business transaction
43:53okay yeah
43:56the individual columns of the worksheet
43:58are then total up and these totals will
44:01be used to prepare the financial
44:03statements so you see that uh happening
44:06later on
44:08okay
44:10now um
44:12remember we said that asset equals to
44:14liability plus equity
44:16okay so if we give you uh some
44:18information and there's some other
44:20information is missing from the equation
44:22we can actually try to find out those
44:25missing
44:26numbers right
44:28if you know that the left side must be
44:30equal to the right side
44:31okay so
44:33here we are using the accounting
44:35equation to solve for missing figures
44:38so the current equation can also help us
44:41solve for missing figures why
44:43because the asset side which sometimes
44:45we call it the left side
44:48must always equal to the claims which is
44:50the liability plus the equity side right
44:53so
44:55let's have an example
44:56you got this uh organization kurdish
44:59enterprise it has current assets of 34
45:02000
45:03current liabilities eight thousand
45:05non-current liabilities of eighty
45:06thousand and equity 160 000 what's the
45:09amount of non-current assets okay
45:13so
45:14in this example
45:16we begin to realize
45:19that under the asset category we can
45:21subdivide it into some further category
45:24so in this case here
45:27if it is an asset category you can have
45:29this thing called current asset as well
45:32as non-current asset
45:34and then for the liability uh category
45:38you can have current liabilities and
45:40non-current liabilities we will talk
45:42about
45:44them in greater detail at a later time
45:46but just for this moment
45:49real
45:53recurrent and not
46:14okay in this case here
46:15if you want to um
46:19total up the
46:21current assets and the non-current
46:22assets
46:24you will have
46:26one figure total assets right
46:29right the total assets so you have 34
46:32000 which is current assets plus you
46:34don't know how much is the non-current
46:35asset
46:36but you know that it's equal to the
46:38total liabilities now in this case here
46:41you have current liabilities 8 000 and
46:43non-current liabilities of 80 000 so the
46:45total liabilities is 80 000 right i'm
46:48sorry 88 000 correct
46:50right
46:50plus the equity of 160 000 so
46:53you simplify the equation 34 thousand
46:55plus question mark equals two hundred
46:56forty eight thousand so that thing uh
46:58for the non-current assets will be
47:00two hundred forty fourteen thousand so
47:03what you are doing is to try to find out
47:05the missing number
47:08all right huh so if the question
47:12has got some
47:13uh give you some information and
47:17you
47:18need to find a missing number
47:20you can use this account equation
47:23right
47:25okay
47:26the next thing
47:28will be financial reporting obligations
47:32so as mentioned in topic one which is
47:34last week
47:35the entities financial report includes
47:37the following four financial statements
47:40number one the statement of financial
47:41position this is this is actually
47:43revision
47:44statement a financial position known as
47:45the balance sheet
47:47number two statement of comprehensive
47:48income is known as income statement well
47:51and then number three statement of cash
47:53flows also known as the cash flow
47:55statement and finally the statement of
47:57changes in equity so for this
47:59um
48:00[Music]
48:01session we'll do the first one the
48:04statement of financial position
48:07right
48:09okay let's talk a little bit more about
48:11it the statement of financial position
48:14is a financial statement
48:17what is inside there
48:19it has got
48:20the entities assets
48:22liabilities and equity
48:24at a particular point in time so this
48:27part is important
48:29at one point of time it's like taking a
48:32photo
48:33is you it's as at that particular point
48:38so it's the end of the reporting period
48:42so if it is
48:43at a particular point in time we need to
48:45know exactly when that point of time is
48:49right
48:50so it is important to establish
48:53when reading a statement of financial
48:55position the date for which it was drawn
48:58up
49:00hence so therefore it is important to
49:01display the date prominently in the
49:04heading in the statement you've got a
49:06title right so you must have got that
49:10date
49:12there
49:13right because it's at a particular point
49:15of time
49:18okay
49:19so the same financial position shows
49:22what resources
49:23the entity owns or controls
49:28at a particular date meaning that it
49:30shows what the assets are
49:32and then on the other side
49:35it shows how those resources of assets
49:37are funded in other words just now we
49:39say it's either from external parties
49:41which means the liability and this is
49:43what the
49:44entity is owing outside
49:47okay to outsiders and
49:51it could be funded from the owners or
49:52the shareholders which are equity so
49:55asset on one side is equal to the total
49:58liabilities plus the total equity
50:03now this is an example of a statement of
50:06financial positions i just want you to
50:08have a look
50:09at the rough format okay so
50:13uh you've got assets on one side so here
50:16you can you see current assets and
50:18non-current assets
50:19right so current assets you can list out
50:21what they are right and then each one of
50:24them they have got amount over there
50:26so this part here can you see this class
50:29the 78070 this part
50:32this is the total current asset
50:36right you can do the same for the
50:38non-current assets so in this example
50:40you've got office furniture and office
50:41equipment so you've got two non-current
50:42assets so this 9700 over here will give
50:46you the total
50:47non-current asset
50:49if you total these two figures up
50:52you get another total over here which we
50:55call the total asset
50:57eight seven seven seven zero
51:00okay yeah
51:01now let's have a look at the liabilities
51:03part you got current liabilities and
51:05you've got non-current liabilities as
51:06well
51:07right so in this example they have got
51:10one
51:11current liability which they call
51:12accounts payable this is the amount over
51:14here
51:15and they also have one non-current
51:18liability which they call a loan so if
51:21you total up these two you have the
51:23total liabilities right
51:25correct
51:26the the current liability and the
51:28non-current liability gives you the
51:29total liabilities right if you take the
51:33total asset
51:34away
51:36with
51:37the total liabilities
51:39the remaining figure that you have here
51:41is what they call the net assets you can
51:44do it like this
51:46and then on the other side
51:48will be
51:49your equity so you've got two items of
51:52equity the capital as well as the profit
51:55that thing total up must be equal on
51:59both sides here huh the net assets and
52:01the total equity so this is
52:04how
52:05the statement of financial position
52:08uh should
52:09look like roughly
52:11uh when you get to prepare it okay
52:15so note the formula the total assets
52:17minus total abilities equal to the net
52:19assets which is equal to the equity this
52:21is the result of
52:23some
52:25rearrangements of the
52:28accounting equation because you know the
52:30asset
52:31equals to liability plus equity right so
52:34if you bring the liabilities to the left
52:36side asset minus liability
52:38will be equal to equity it says it's
52:41actually the same
52:43idea yeah
52:45so
52:46um
52:47yeah this this part is a little bit of a
52:50revision but let's have a look at it
52:52more closely here you've got asset
52:54definition
52:56an asset is defined in the conceptual
52:58framework as a present economic resource
53:01controlled by entity as a result of past
53:04events
53:06where the economic resource
53:08is a right that has a potential to
53:11produce economic benefits when
53:13what we mean by this is
53:15future economic
53:17benefits so there are three conditions
53:19if you look at this um
53:23definition according to the conceptual
53:26framework
53:27first
53:28you must
53:29it must be a present economic resource
53:32in other words it's a right
53:34that has potential to produce economic
53:37benefits
53:39it is something that is controlled by
53:41the entity and it is a result of past
53:44events
53:45okay so um
53:48i'll give you an example all right okay
53:50huh
53:51um
53:53now
53:54let's say
53:55that this asset
53:57remember you said an example of the
53:58asset is cash right
54:00cash everybody understands cash right
54:02okay
54:03is it
54:05something that the
54:06something that is going to provide
54:10the
54:11organization with some benefit later on
54:13the answer is yes
54:15because the organization can use this
54:18cash
54:19to buy some
54:23the suppliers or things like that
54:25so it's going to provide uh some form of
54:28future benefits
54:30okay
54:31is it something that is controlled
54:33if well if it is
54:36belonging to the business then the
54:38business has
54:39control over it right so yes there is
54:42control
54:43uh criteria
54:44and
54:46is it a result of fast events the answer
54:48is yes because if you think about it
54:52the cash does not just appear from
54:54nowhere isn't it if you if the business
54:57has got cash today
54:58right
54:59it must be a result of something that
55:01happened in the past
55:03maybe the owner has contributed the cash
55:06to the business or maybe
55:09in the past there has been some sale
55:15a past event it doesn't just appear
55:18miraculously yeah all right
55:23so you can think about this
55:50right
55:51sometimes okay
55:53right we are back on
55:56okay you know that
55:58uh accounts receivable is another asset
56:00and you know that inventory is another
56:02asset so i would like you to have a
56:05thought about
56:07how
56:07this accounts receivable
56:18must have
56:20uh must satisfy
56:22all these three conditions so you must
56:24think something must happen in the past
56:27and it is it controlled by the entity
56:29the answer should be yes right and
56:32how is this accounts receivable or
56:35inventory
56:37going to be uh
56:39providing some benefits in the future
56:41right
56:42okay so um i i'll leave you to to
56:46uh think about it yeah
56:48now let's have a look at liability
56:51again it is defined
56:54in the conceptual framework it is
56:56actually a present obligation of entity
56:58to transfer an economic resource as a
57:00result of past events so there is a
57:03definition if we break it down you can
57:06see three conditions as well the first
57:08one
57:09it is a present obligation it is
57:11something that the business is owing
57:15to outsiders right now not tomorrow not
57:20before but right now present
57:23okay yeah
57:25and condition number two there is an
57:28obligation to transfer an economic
57:30resource in other words uh if you've got
57:32a liability
57:33then sometime in the future
57:36it
57:38needs to be paid all right so for
57:40example if you got a loan a loan is a
57:42liability right we know that sometime in
57:44the future it needs to be paid
57:46if you got an amount owing to the
57:48supplier we know that sometime in the
57:49future it needs to be paid as well to
57:51the supplier right so there is a uh an
57:54obligation to transfer
57:56an economic resource at some time in the
57:58future
58:00and
58:01this
58:01obligation that we have right now
58:04did not appear out of nowhere it is a
58:08result of something that happened in the
58:10past
58:12think about it something must have
58:14happened before
58:16so let's say for example today
58:18president today
58:20the business owes some money to the
58:23supplier
58:24right the business owes some money to
58:26the supplier right now
58:28but why is the business owing some money
58:30to the supplier if
58:46that
58:47is related to
58:48the amount that is owing now right now
58:52and it needs to be
58:53paid sometime in the future so
58:57think about another
59:00liability so i give you a loan right
59:03think
59:05um what happened in the past that
59:08results in a loan now
59:12well sometime before the business must
59:14have
59:17got a loan from the bank right so that
59:19is why the business is owing money to
59:21the bank right now
59:24and it's got to be paid sometime in the
59:26future
59:27right now
59:30how about equity equity is in uh is
59:32interesting
59:33because according to the conception
59:35framework right it is the residual
59:37interest
59:38in the assets after deducting
59:40liabilities
59:41so
59:42let's make it very clear
59:44equity cannot be defined independently
59:47of assets and liabilities in other words
59:50if you want to to express what equity is
59:53you need to know
59:55the assets and liabilities
59:57it doesn't have an independent
59:59definition okay so in other words
1:00:02equity is simply assets minus
1:00:04probabilities
1:00:05okay now equity comprises of various
1:00:08items i give you the two most common one
1:00:11the first one is capital
1:00:13uh which are contributions by the owners
1:00:15or the shareholders if it's the case of
1:00:17a company
1:00:18and number two it's retained profits uh
1:00:21also known as retained earnings so this
1:00:24comes from the profits that are earned
1:00:26from
1:00:27the the organization okay
1:00:32okay now the next thing let's have a a a
1:00:35demo problem
1:00:36okay
1:00:37uh there is this person
1:00:39uh john
1:00:41okay
1:00:42commences means start
1:00:44john starts a loan mowing business you
1:00:46know loan mowing business you cut the
1:00:48grass for somebody else okay
1:00:51um the business has got a name
1:00:53right it's called green enterprise
1:00:56uh putting ten thousand dollars of his
1:01:00own money into the business bank account
1:01:02so can you see from this point
1:01:05that the owner and the business are two
1:01:07separate things
1:01:09the owner is not the same as the
1:01:10business the name of the owner is john
1:01:12the name of the business is green
1:01:14enterprise
1:01:15all right huh
1:01:17so
1:01:20let's talk about the business
1:01:21green
1:01:22enterprise borrows 5000
1:01:26from the bank to further fund the
1:01:28business
1:01:30and then
1:01:31the next day on day 2 green enterprise
1:01:34purchases a mower for 4 000 cash
1:01:38and pays two thousand dollars for
1:01:40advertising so in this case here
1:01:42let's have a look
1:01:45at the first thing
1:01:46john commences a lawn mowing business
1:01:49called green enterprise putting 10 000
1:01:52of his own money into the business bank
1:01:53account now before we go on right um
1:01:57let me share with you
1:01:58some things that we normally do when we
1:02:01prepare accounts okay two things
1:02:04number one accounts people
1:02:08uh
1:02:09i use the word accounts people be uh
1:02:11rather than accountant because accounts
1:02:14people is more general so anybody who's
1:02:16doing accounts
1:02:17uh accounts people
1:02:19okay often use comma this is comma to
1:02:24denote thousands for example
1:02:27one zero comma zero zero zero means ten
1:02:30thousand
1:02:32or
1:02:33this 100. the reason why we have
1:02:36separator or comma is to make the
1:02:38numbers easier to read
1:02:41okay
1:02:44um
1:02:45the second thing
1:02:47because people often use curved brackets
1:02:49so this is a look at this curved bracket
1:02:51to denote negative numbers so for
1:02:53example
1:02:55this 10 000 in curved brackets right
1:02:58means negative 10 000 or minus 10 000 uh
1:03:01is that quite clear all right the reason
1:03:04for this
1:03:06uh why why accounts people normally use
1:03:08curved records rather than this tiny
1:03:10minus sign
1:03:12is because we have a lot of numbers to
1:03:15look at in real life
1:03:17and if you do
1:03:19it's very easy to miss out a small tiny
1:03:21minus so we put a big bracket to show
1:03:25that it is a negative sign
1:03:27all right
1:03:30so in this case here
1:03:31uh you can see
1:03:33uh the worksheet it looks something like
1:03:35this okay on the left side you've got
1:03:36the asset items
1:03:38uh on the right side you've got the
1:03:39liability and owners equity items over
1:03:41here all right so you got two uh two
1:03:45uh types of assets cash is one of them
1:03:47and more eventually later on you will
1:03:50see that there's a mower okay
1:03:52the value of the cash goes up because
1:03:54now the business has got ten thousand
1:03:56dollars cash right okay
1:03:59um
1:04:00where did the cash comes from it must
1:04:01come from somewhere right it came from
1:04:03the owner so it's the capital because
1:04:06the owner puts in that ten thousand
1:04:08dollars cash as capital so capital is
1:04:11equity
1:04:12right you can put a comment on the right
1:04:14side so you can say the owner starts a
1:04:16business like this
1:04:18okay yeah
1:04:19right
1:04:22can you see that the left side equal to
1:04:23the right side
1:04:25left side total here
1:04:27the total on the left side is ten
1:04:30thousand plus zero is ten thousand right
1:04:32on the the total on the right side is
1:04:34zero for loan plus capital is ten
1:04:36thousand so total on the right side is
1:04:38ten or so
1:04:40so total on the left side and total on
1:04:41the right side is equal
1:04:43okay
1:04:45next
1:04:47uh next transaction green enterprise
1:04:49borrows five thousand dollars from the
1:04:51bank to further fund the business so
1:04:53when this happens
1:04:57uh the business will get five thousand
1:05:00dollars more right because
1:05:02the bank will
1:05:04lend five thousand dollars more to the
1:05:05business right so the business has got
1:05:07an extra five thousand dollars
1:05:09increases cash by five thousand so
1:05:11positive increases
1:05:14okay
1:05:15but
1:05:16now the difference is there is a loan an
1:05:18amount owing to the bank right so that
1:05:20loan increases by 5000 as well
1:05:23so now uh after two transactions the
1:05:26first one and the second one
1:05:27you got
1:05:29cash
1:05:3015 000 if you total it up
1:05:33okay you got a liability in the form of
1:05:35a loan is five thousand and then the
1:05:36capital total if you total up is ten
1:05:38thousand so
1:05:40uh total asset which is fifteen thousand
1:05:43equals to total liability which is five
1:05:45thousand plus total owner's equity which
1:05:47is ten thousand
1:05:51now remember the next day
1:05:53green enterprise purchased a mower for
1:05:55four thousand dollars cash and pays two
1:05:57thousand dollars for advertising okay
1:06:00so
1:06:02from this description
1:06:05um
1:06:06how does it actually affect the
1:06:07accounting equation let's talk about
1:06:09buying the mobile first
1:06:11they use cash so cash goes down right
1:06:14so cash goes down
1:06:16so we put uh negative 4000 over here
1:06:19remember we use uh bracket
1:06:22it goes down but now you've got mower
1:06:25the value of the mower goes up
1:06:27the mower was not there before so now
1:06:30there is a mower right so it goes up by
1:06:334 000
1:06:35and it has got nothing to do with
1:06:37liability or owner's equity
1:06:40so this particular transaction
1:06:42there is a decrease in an asset item
1:06:45cash
1:06:46of 4 000 an increase in another asset
1:06:49item
1:06:51called more
1:06:52by 4000
1:06:54okay so the total on the left side is
1:06:57zero
1:06:58right and the total on the right side is
1:07:01also zero right
1:07:03okay so is it equal and balancing yes
1:07:07even if the total is zero
1:07:09right
1:07:10and then the next thing is the business
1:07:13paid for advertising so of course cash
1:07:15goes down some more so that's
1:07:18minus 2 000
1:07:20right
1:07:21and advertising is an expense
1:07:24so
1:07:26it is going to reduce the equity right
1:07:30so that's why
1:07:32uh under here right profit and loss it
1:07:36reduces
1:07:37right so negative 2000 over here and we
1:07:40call it advertising okay so is it
1:07:43balancing yes because the total on the
1:07:45left side is
1:07:47negative 2 000 and the total on the
1:07:48right side is also negative 2 000 it is
1:07:52balancing
1:07:57and then the next thing that we're going
1:07:58to do
1:07:59in this worksheet is to total up all the
1:08:02columns
1:08:04right so
1:08:06if you total up now be careful whether
1:08:08it is positive or negative figure
1:08:10right
1:08:12so ten thousand plus five thousand
1:08:13fifteen thousand minus four thousand
1:08:15minus two thousand you get nine thousand
1:08:18yeah do the same thing for the others uh
1:08:20so more you get four thousand in total
1:08:23loan you get 5 000 total capital you get
1:08:2510 000 and then p and l profit and loss
1:08:28uh here there's a negative 2 000. so if
1:08:31you total up the left side you get 13
1:08:34000 right
1:08:359 000 plus 4 000 13
1:08:37and then if you total up the right side
1:08:39you are supposed to get thirteen
1:08:41thousand also
1:08:42so five thousand plus ten thousand
1:08:43fifteen thousand minus two thousand is
1:08:45thirteen thousand
1:08:47all right huh so
1:08:49that's
1:08:50the worksheet
1:08:52your first worksheet
1:08:53okay
1:08:56now
1:08:57uh from the worksheet which was in the
1:09:00previous slide you are now ready to
1:09:02prepare
1:09:04the statement of financial position so
1:09:05it's got two sides one is the asset side
1:09:07and the other one is liability and
1:09:08owner's equity
1:09:10so the asset side you've got two types
1:09:12of assets cash and more and you've got
1:09:14the numbers over here these numbers are
1:09:17from the bottom
1:09:18line the last line of the worksheet
1:09:21okay and then you can total up this
1:09:24equals thirteen thousand
1:09:26total asset
1:09:27and then for liability you got one
1:09:29liability only that's loan your total
1:09:31liability is five thousand also
1:09:35and then for owner's equity you got the
1:09:36capital and they got the loss which is 2
1:09:38000 so you got the owner's equity is
1:09:40eight thousand eight thousand plus five
1:09:43thousand
1:09:44is thirteen thousand
1:09:46that's the right side so the total on
1:09:47the left side
1:09:49is equal to the total on the right side
1:09:50so this is how
1:09:52the statement of financial position work
1:09:54right
1:09:58okay now we will vary the description a
1:10:02little bit
1:10:03okay so everything is the same over here
1:10:05uh john commences the loan mowing
1:10:07business called green enterprise putting
1:10:0810 000 of his own money into the
1:10:10business bank account same
1:10:12green enterprise borrows 5000 from the
1:10:14bank to further fund the business is
1:10:16still the same but now
1:10:18we will change
1:10:20uh
1:10:21a little bit
1:10:22of the example so on day two
1:10:25green enterprise purchases a mower for 4
1:10:28000
1:10:29cash
1:10:30and pays two thousand dollars for
1:10:33advertising but what if the owner oh
1:10:36sorry what if the mobile was purchased
1:10:38on credit
1:10:39with the four thousand dollar still
1:10:41owing to the supplier so in this case
1:10:44here
1:10:45they didn't pay cash for the mower
1:10:47so
1:10:48you have to create another liability
1:10:51which you call accounts payable so in
1:10:54this case here the difference was this
1:10:57line here
1:10:58you've got the mower
1:11:00which
1:11:02is there but the business did not pay
1:11:04cash so there is no
1:11:07minus 4 000 for
1:11:09cash column
1:11:10instead you are creating an amount owing
1:11:14to the supplier because you have not yet
1:11:16paid them yet
1:11:18right so there's a four thousand
1:11:20here
1:11:21okay so everything else is the same
1:11:23so if you total up okay total cash is 13
1:11:26more is 4 000 so if you total on the
1:11:29left side is 17 000
1:11:32total liability will be 5 000 plus 4 000
1:11:35which you have created
1:11:37for accounts payable
1:11:39plus the
1:11:42capital and profit and loss
1:11:44okay you
1:11:45should get
1:11:47a total of 17
1:11:50000 if you prepare the statement of
1:11:52financial position
1:11:55um
1:11:56your
1:11:57accounts payable
1:11:59will be four thousand this time and then
1:12:01instead of nine thousand dollars cash
1:12:03you got 13 000 because you didn't pay
1:12:06uh
1:12:07cash for the mower so you got more cash
1:12:10all right yeah so the left side total is
1:12:1217 000 and then the right side total is
1:12:1417 000 also so i'll leave you to look at
1:12:16this in greater detail
1:12:18in your own time okay
1:12:24okay uh
1:12:25next
1:12:27um
1:12:28you have seen
1:12:30a simple statement of financial position
1:12:32now let us have a closer look at it we
1:12:35talk about the format and presentation
1:12:37of the statement of financial position
1:12:39all right
1:12:40there are actually two main formats the
1:12:43first one is called the t format
1:12:46in which
1:12:47assets are recorded on the left side and
1:12:48then liabilities and equity are recorded
1:12:50on the right side you have seen it in
1:12:52just the previous uh example where the
1:12:54asset is recorded on on the left side
1:12:56and then the liabilities and equity is
1:12:58record and on the right side this is
1:13:00what we call
1:13:01uh the t
1:13:03format presentation
1:13:06you have also seen
1:13:09um
1:13:10a narrative format okay in which case
1:13:14the asset the liabilities and equity are
1:13:16presented down the page either is a
1:13:19equals to l plus b type of format or a
1:13:22minus l equals to p type of format where
1:13:25by a is asset l is liability and p is
1:13:30owner's equity
1:13:32okay yeah um
1:13:35do you remember seeing that just a
1:13:38moment ago
1:13:39i'll show it to you yeah
1:13:42the okay this is the t format
1:13:44it looks like a t with uh asset on one
1:13:47side liabilities and equity on the other
1:13:50side
1:13:51the narrative format you've seen it just
1:13:53now
1:13:54where is it yeah
1:13:58um
1:14:01oops
1:14:02okay this is the narrative format
1:14:04it presented the items are presented
1:14:06down the page
1:14:08so the numbers are presented down rather
1:14:10so you can't see a t here
1:14:12okay the asset presented first and then
1:14:14reliability and equity are presented
1:14:16later so this is the narrative format
1:14:18okay
1:14:19the advantage of this type of format is
1:14:21uh you can actually write down la uh the
1:14:25previous
1:14:26uh
1:14:27years or previous periods numbers
1:14:29in another column
1:14:31you cannot do that easily if you do a t
1:14:34format
1:14:35show you the t format again
1:14:38um
1:14:39okay this d format
1:14:41okay
1:14:43you know you can't present last year's
1:14:44numbers easily like this it gets very
1:14:46confusing okay so
1:14:49that is why
1:14:53most
1:14:54statements of financial position
1:14:56uh the published statement of financial
1:14:58position the one that they use are in uh
1:15:01by outside uh people the
1:15:04the real
1:15:05published statement of financial
1:15:07position in other words they will use a
1:15:09narrative format
1:15:11because
1:15:14um
1:15:15there's an advantage of the narrative
1:15:17format it allows comparative information
1:15:20to be shown easily
1:15:23and
1:15:24not not only that
1:15:26there is a requirement
1:15:30to
1:15:31show the comparative information there
1:15:35is a requirement it is not uh something
1:15:38that is uh you know by choice it is
1:15:40required
1:15:42in real life okay yeah
1:15:46so that's why when you look at um
1:15:49publish financial statements you will
1:15:50see two columns one for this period one
1:15:54for the previous period
1:15:57so t format looks something like this
1:16:00okay
1:16:02there's more things inside there so you
1:16:04can have a look at the the common types
1:16:07of things that go into assets
1:16:10liabilities and equity over here okay
1:16:14if it is the narrative format same type
1:16:17of information but presented down the
1:16:20page like this
1:16:24okay comparative information
1:16:28is information for the previous
1:16:30financial period right it allows the
1:16:32users to see
1:16:35how the entity's financial position has
1:16:37changed between the current and previous
1:16:40financial period is it increasing
1:16:43or is it decreasing
1:16:45or maybe there's no change from the
1:16:47previous period to this to this period
1:16:50okay
1:16:54the next thing
1:16:56let's talk about
1:16:59presentation of disclosure of the
1:17:01elements in the statement of financial
1:17:04position
1:17:05right
1:17:06how do we present and disclose the asset
1:17:11items the liability items and the equity
1:17:14items in the statement of financial
1:17:17position in other words
1:17:21accounting standards
1:17:24exist
1:17:26to prescribe the presentation
1:17:28classification and disclosure
1:17:29requirements for asset liabilities and
1:17:31equity on the statement of financial
1:17:33position what this means
1:17:35is that
1:17:36the way we present the asset liabilities
1:17:40and equity items
1:17:42is guided
1:17:46by what we call the accounting standards
1:17:49okay so what this means is that
1:17:53um if you want to do it properly
1:17:55right do the statement of financial
1:17:57position properly
1:17:59you cannot prepare it in any way you
1:18:02like there is a particular way to do it
1:18:06and we want to
1:18:08teach you the
1:18:09proper way to do it okay yeah and that
1:18:12way is in accordance with the accounting
1:18:14standards so we learn the correct way
1:18:17right so that when you see
1:18:19a statement a financial position that
1:18:22looks a little bit strange you are aware
1:18:25of it okay we want to learn the correct
1:18:27way so that when you see it done the
1:18:29wrong way you will know okay
1:18:34even though not legally required some
1:18:37entities with no public accountability
1:18:40voluntarily
1:18:41voluntarily address similar
1:18:43classification presentation and
1:18:44disclosure practices as required by
1:18:47accounting standards now
1:18:50public accountability itself means
1:18:52obligation or responsibility to report
1:18:54to the public okay um
1:18:58i'm not sure whether you remember this
1:19:00okay but uh in the previous period
1:19:04uh we say that
1:19:06um
1:19:09in terms of companies right there are
1:19:11the private companies and the public
1:19:13companies right
1:19:15okay the public companies they get their
1:19:17money from the public so they have an
1:19:20obligation to report to the public
1:19:22right so
1:19:24therefore they cannot simply just do it
1:19:27uh the other accounts in any way they
1:19:29like
1:19:30they must follow the accounting center
1:19:31it is a must
1:19:33okay for the private companies
1:19:37um the only people that they are going
1:19:39to report to are the you know the
1:19:41shareholders of the private companies
1:19:43but
1:19:44for private companies they're not that
1:19:45many anyway
1:19:46so
1:19:48uh they don't actually have to
1:19:51follow the accounting standards
1:19:53but for good practice
1:19:56uh many public companies will still
1:19:59follow the accounting standards because
1:20:00they want to do it properly okay so i
1:20:03think this is a good thing to
1:20:06you know it's a good thing to to to do
1:20:10right to voluntarily
1:20:12use the accounting standards even though
1:20:16they might not have to in uh for example
1:20:19in the case of private companies okay
1:20:24so um
1:20:26how do you present the assets so just
1:20:28now you saw that there were things of
1:20:30current assets there were non-current
1:20:31assets right okay so we will do this but
1:20:34how what is the difference between
1:20:35current assets and non-current assets
1:20:37anyway
1:20:40actually the distinction between current
1:20:42and non-current
1:20:43is based on timing
1:20:45okay so if the economic benefits of the
1:20:48asset or outflow of resources for the
1:20:50liability are expected to be realized
1:20:54within 12 months from the date
1:20:57of the statement of financial position
1:20:59then the asset or liability is
1:21:00categorized as current okay so
1:21:04example
1:21:06um accounts receivable is an asset right
1:21:10okay
1:21:12we
1:21:13will consider accounts visible as a
1:21:15current asset why
1:21:17because it is expected that the business
1:21:20will collect the money
1:21:22from the customer accounts receivable
1:21:26within 12 months from the date of the
1:21:28statement of financial position they
1:21:30cannot take their own sweet time to
1:21:32collect money from the customer right so
1:21:34within the next 12 months they're
1:21:35supposed to collect it already
1:21:37okay so that is why it is current how
1:21:40about
1:21:41amounts owing to the supplier
1:21:44we call we categorize this as a current
1:21:47liability why because it is expected
1:21:51that the business will pay to the
1:21:53supplier
1:21:55less than 12 months from the date of the
1:21:58statement of financial position because
1:22:00on the date of the statement of
1:22:01financial position we know
1:22:03that the business is owing money to the
1:22:05supplier but when is the business going
1:22:07to pay to the supplier
1:22:08in less than 12 months from that date
1:22:11because if it doesn't happen guess what
1:22:14the supplier is going to chase for the
1:22:17money right okay so
1:22:19yeah
1:22:20now
1:22:21if economic benefits of the asset or
1:22:24outflow resources of the liability are
1:22:26expected
1:22:27to be realized after the 12 months from
1:22:30the date of the statement of financial
1:22:31position then the asset or liability is
1:22:34categorized as non-current
1:22:36so i will explain it by using two
1:22:38examples one for asset and one for
1:22:40liability and i'll tell you why they
1:22:43categorize it as non-current
1:22:45remember from the previous
1:22:49session
1:22:50one example
1:22:51of a non-current asset is property plan
1:22:54and equipment
1:22:56right okay why is it a non-current asset
1:22:59rather than a current asset because when
1:23:01you when the business buys
1:23:04furniture or computer or a car
1:23:09right it is expected that the business
1:23:11is going to use it for more than one
1:23:13year
1:23:15right
1:23:16um so that is why it is non-current
1:23:20right um another example now this time
1:23:22i'm going to give a liability example
1:23:25you know a loan is a liability right a
1:23:28loan is and
1:23:30we would normally
1:23:32um uh categorize
1:23:35the loan as a non-current liability
1:23:37why because when the business has got a
1:23:39loan from the bank we do not pay the
1:23:42bank so soon because a loan normally
1:23:44will will last for two years three years
1:23:46four years five years or even 10 years
1:23:48right
1:23:49then then they're paid back
1:23:52so
1:23:53for that reason we were classified as a
1:23:55non-current liability right
1:24:00so give you some examples of assets in
1:24:03fact current assets in fact they have a
1:24:05lot
1:24:06for our purposes
1:24:07i'll give you the examples that we are
1:24:09going to come across again and again all
1:24:12right if you see cash
1:24:14or bank which is money in the bank
1:24:17or accounts receivable also known as
1:24:19debtors prepayments also known as
1:24:21prepaid expenses or inventory any of
1:24:23this uh you need to be aware that it is
1:24:26a current asset
1:24:27okay
1:24:28if you uh see property flight equipment
1:24:31this is a non-current asset is it okay
1:24:35all right yeah
1:24:38so as you can see here this is the
1:24:40example can you see current asset over
1:24:42here you can see the uh
1:24:46some examples you've got cash okay
1:24:49receivables inventories okay non-current
1:24:52asset
1:24:53you got plan and equipment can you see
1:24:55that
1:24:56uh you got this
1:24:59uh intention don't worry too much about
1:25:00intangible asset okay um
1:25:04we won't be
1:25:05doing it
1:25:07for this uh this uh
1:25:09unit
1:25:11uh is just there to let you have a look
1:25:13all right so you give your total assets
1:25:16over here
1:25:18now let's talk about current liabilities
1:25:19okay we've got
1:25:21bank overdraft means money owing to the
1:25:23bank which you need to pay as soon as
1:25:25possible
1:25:27it's a amount of money in the bank that
1:25:29has gone negative
1:25:30you have to pay this as soon as possible
1:25:32because the interest rate for overdraft
1:25:34is very high
1:25:36okay it's like a credit card interest
1:25:39rate very high so
1:25:44it's a current liability law because
1:25:45it's expected that the business will pay
1:25:47as soon as possible
1:25:49um trade payables
1:25:52money owing to supplier you need to pay
1:25:54as soon as possible accrual
1:25:56uh also known as accrued expenses
1:25:58accruals are things like you know if
1:25:59you've got money owing to for electric
1:26:02uh company
1:26:04all right water
1:26:06uh
1:26:07unpaid salaries you need to pay it as
1:26:09soon as possible unless
1:26:11i mean you need to pay as soon as
1:26:13possible otherwise
1:26:14the electric company or the water
1:26:16company or the employees will start to
1:26:18chase
1:26:20all right
1:26:22uh income tax payable
1:26:24you need to pay that as soon as possible
1:26:26if not the tax department will start
1:26:28chasing
1:26:29okay unearned revenue uh it is also
1:26:32known as
1:26:34revenue received in advance are money
1:26:37that you have received from the customer
1:26:40but you have not yet done the sale
1:26:43okay a classic example is um
1:26:46let's say
1:26:48uh if it is an airline company you know
1:26:51airline right like uh asia and things
1:26:53like that when you buy the when you buy
1:26:55a ticket you have to pay first right
1:26:58okay but the airline company here has
1:27:00not yet provided the service then it is
1:27:04actually an unearned revenue they
1:27:06receive the money but they have not yet
1:27:08provided the service so it's a liability
1:27:10yeah
1:27:11it's not an income at that point of time
1:27:15examples of non-current liabilities
1:27:17you've got loans which i mentioned just
1:27:18now
1:27:19you might have mortgages and debentures
1:27:21so i'm going to simplify the
1:27:24uh the
1:27:26explanation just think of mortgages and
1:27:29debentures as something like loans as
1:27:31well so if you see this it's a
1:27:33non-current liability okay the reason
1:27:35why i put that inside there
1:27:37is because i think in your
1:27:39some some way along your
1:27:42tutorial questions you might come across
1:27:44mortgages and debentures if you see it
1:27:46it is a non-current liability
1:27:50okay so the presentation is as follows
1:27:53for the liabilities you got the current
1:27:54liabilities so you can see some examples
1:27:57of current liabilities and then the same
1:27:59thing for non-current liabilities over
1:28:01here
1:28:02all right um
1:28:05i think for the for our purposes let's
1:28:07make life simple right just look at the
1:28:10borrowings the borrowings will be the
1:28:11loans and the benches that's it okay
1:28:14don't worry too much about the other
1:28:16things over here right
1:28:19uh
1:28:20what we are just showing you that is
1:28:22that you know uh in in real life there
1:28:24are
1:28:25quite a number of other things over
1:28:27there and
1:28:28the fact that you need to total up the
1:28:30non-current asset and the
1:28:32current asset
1:28:34so that you get a total
1:28:36sorry the non-current liability and the
1:28:40current liability so that you get the
1:28:41total liabilities right
1:28:44how about the equity
1:28:46um
1:28:48depending on the
1:28:49entity structure
1:28:51the terminology
1:28:53and equity classification were
1:28:55appearing on the statement of financial
1:28:57position will vary so if you've got a
1:28:59sole trader and a partnership
1:29:01you will have profit loss and drawings
1:29:04which contributes directly to equity
1:29:07that means
1:29:08um
1:29:11um
1:29:12you've got the original equity and then
1:29:15if you've got profit and loss you just
1:29:16add the uh add to that equity if you go
1:29:18drawings you just minus off from that
1:29:20equity for the sole trader and
1:29:22partnership
1:29:23for the companies
1:29:25you have got share capital
1:29:27you have got retained earnings and you
1:29:29might have reserved and it's going to be
1:29:31on separate line
1:29:32okay one line for
1:29:34capital one line for retaining earnings
1:29:36one line for reserve but don't worry too
1:29:37much about the reserve law because
1:29:39um we won't really be talking about it
1:29:42but we will be talking about the share
1:29:44capital and the retained earnings
1:29:45because uh sometimes we do the accounts
1:29:47for companies right
1:29:49retailers remember is also known as
1:29:51retained profits
1:29:55so this is an example
1:29:57okay you can see here equity you've got
1:30:00the
1:30:01um
1:30:02the share capital which they call
1:30:03contributed equity right you've got the
1:30:06reserve and you've got the retained
1:30:07earnings so there are three things here
1:30:08you got the total equity over here
1:30:10right
1:30:11um from here
1:30:14from here i can tell that it is
1:30:17the equity section of a company
1:30:21right um
1:30:24because this is the normal
1:30:26format and if you look here double
1:30:28confirm yes i can see it limited here so
1:30:31i know it is a company structure
1:30:33okay
1:30:38okay the next one
1:30:40okay um
1:30:42we're gonna
1:30:43measure property equipment
1:30:46okay um now remember just now we said
1:30:49property equipment or ppe they are
1:30:51non-current assets
1:30:54and then what else do we need to know
1:30:55about ppe
1:30:57most property plant equipment have
1:30:59limited useful lives
1:31:01and must be depreciated in other words
1:31:04the time period where it is useful
1:31:07is limited it could be a couple of years
1:31:10like a car
1:31:12might be useful for let's say for
1:31:14business purposes maybe about five years
1:31:16kind of thing
1:31:17right furniture a few things like this
1:31:19maybe a bit longer
1:31:21but computers
1:31:24not
1:31:25that long
1:31:27right maybe about three years or
1:31:28something it needs to be changed
1:31:31right
1:31:32so
1:31:33um
1:31:35depreciation
1:31:36is
1:31:38uh the allocation of that
1:31:40depreciable amount of the asset we'll
1:31:42talk a little bit more about that when
1:31:44we talk about uh calculation of the
1:31:46precision
1:31:48now the depreciable amount of that asset
1:31:50over the useful life
1:31:53right so on the statement of the
1:31:55financial position the depreciable
1:31:58assets are stated at the what we call
1:32:01the carrying amount right so what does
1:32:04it mean it means cost minus what we call
1:32:08accumulated depreciation
1:32:11right so it's a net figure you've got
1:32:13the original cost and then you've got
1:32:15another amount which you call the
1:32:16accumulated depreciation one minus the
1:32:18other is what we call the carrying
1:32:20amount and that carrying amount is the
1:32:22one that gets
1:32:24that you see in the statement of
1:32:25financial position
1:32:28okay
1:32:29um in the next period we will look more
1:32:32closely at the calculation of the
1:32:34depreciation
1:32:36okay now we look at
1:32:38factors influencing the form and content
1:32:40of the statement of financial position
1:32:43the three main influences on the
1:32:45accounts they are number one
1:32:47traditional accounting conventions and
1:32:49drop trains what we normally will do
1:32:53when we prepare the accounts
1:32:55right
1:32:56number two
1:32:57more recent uh theoretical developments
1:33:00in the conceptual framework in other
1:33:01words um
1:33:06more recent ways of doing things
1:33:09right according to the conception
1:33:10framework
1:33:11and any changes to the accounting
1:33:14standards so if you've got one or more
1:33:15of this
1:33:16this will influence how we present the
1:33:20statement of financial position
1:33:24now we're going to start off with
1:33:27um the traditional things because you
1:33:29need to be aware
1:33:31of
1:33:32what we have done
1:33:34for the longest time
1:33:37in the past
1:33:38before you come to the present
1:33:41right huh you need to know what happened
1:33:42before
1:33:44for a long long time for
1:33:47decades or even centuries i suppose but
1:33:51these are what we
1:33:52um
1:33:54talk about in terms of uh traditional
1:33:56accounting conventions and doctrines
1:33:59first of all the first idea there is the
1:34:01accounting entity convention which
1:34:04basically we have talked about it before
1:34:07for accounting purposes the business and
1:34:09owner are treated as separate and
1:34:12distinct right so this
1:34:16uh
1:34:17we came across is now
1:34:19this one the next one money measurement
1:34:22or monetary unit convention what does
1:34:25this mean
1:34:26it means that accounting
1:34:29should only record those items which are
1:34:32capable of
1:34:33being expressed in monetary or dollar
1:34:36value terms
1:34:38if you can record something that
1:34:39involves money
1:34:41then we can record it if there's some if
1:34:43whatever it is does not involve money it
1:34:46does not get recorded in the accounts
1:34:49because there's no money to record
1:34:51okay you need to be able to express in
1:34:55money terms
1:34:56next
1:34:57historical cost convention
1:35:00in other words assets should be recorded
1:35:03at their historical or acquisition cost
1:35:06or equivalent right
1:35:08now
1:35:11this is the first thing that we learn
1:35:14when we talk about assets or even
1:35:16liabilities
1:35:17the amount that we record was something
1:35:20that actually happened in the past so we
1:35:22will record it but
1:35:27some of the items in assets and
1:35:28liabilities are now being
1:35:31reassessed or even challenged
1:35:33by recent developments because
1:35:36some of the asset items
1:35:39can actually change in value
1:35:42right so what if they actually change in
1:35:45value then we
1:35:48uh we may change
1:35:51some of the asset values if appropriate
1:35:53but
1:35:54to simplify things for our purposes
1:35:57we're going to use the historical cost
1:35:59right we won't change the value
1:36:02until
1:36:03some time in the future okay
1:36:09next one
1:36:10is the going concern or continuity
1:36:13convention what does this mean
1:36:16it means that the business will continue
1:36:18operations for foreseeable future
1:36:21meaning that the business does not need
1:36:23to or intend to liquidate the business
1:36:26is not expected to close down anytime
1:36:28soon
1:36:29right
1:36:30um
1:36:32so this is an another idea so hopefully
1:36:35you can understand this right we don't
1:36:36expect the the organization to close
1:36:38shop anytime soon
1:36:40okay the next one
1:36:42the dual aspect of duality convention
1:36:45this means that each transaction has got
1:36:47two aspects and each aspect must be
1:36:49recorded in the financial position asset
1:36:52equals liability plus owner's equity
1:36:54remember just now we said that there is
1:36:55the duality you have to record the
1:36:58uh the transaction in at least two
1:36:59places okay this is what it means all
1:37:02right now
1:37:04the next one
1:37:06if the is objectivity and reliability
1:37:09convention in other words financial
1:37:11reports should be based on objective or
1:37:13verifiable evidence in other words
1:37:16um whatever that gets recorded in the
1:37:19accounts
1:37:20should be as reliable as possible
1:37:25right so if we can get
1:37:27um
1:37:29evidence of that amount
1:37:32then that's the best
1:37:34okay um
1:37:37if you cannot
1:37:39get evidence that means there's no bill
1:37:41or some other
1:37:42um
1:37:44places where you can actually show this
1:37:46is the amount for this transaction
1:37:48um
1:37:50you know
1:37:51the best thing is if you can show
1:37:52evidence now if you cannot
1:37:55then
1:37:56if you cannot show evidence then you
1:37:58might have to do some
1:38:01all right you might have to
1:38:04think what is the most appropriate
1:38:06amount now this would happen um
1:38:08this might happen in real life but for
1:38:11student purposes right so for us here
1:38:14um the numbers will be given to you in
1:38:16the question so you don't have to like
1:38:18really worry that much about how much is
1:38:19this thing
1:38:20okay but what i'm saying is um you know
1:38:23sometimes in real life right we don't
1:38:25have the the the bills and things like
1:38:28that okay we have to think but we know
1:38:30that there's a an amount we have to
1:38:34do some estimation
1:38:36sometimes
1:38:37okay we try not to have too much of this
1:38:39going on
1:38:41the next uh idea is the accounting
1:38:44period convention what this mean what
1:38:46this means is that the entire life of
1:38:48the business from beginning until the
1:38:51end
1:38:52is divided into time periods for example
1:38:54yearly
1:38:56whereby the entity's financial
1:38:57performance and position are calculated
1:38:59and reported okay if you think about it
1:39:02right
1:39:04the time when the business started
1:39:07to the time when the business
1:39:10closes all right
1:39:13um
1:39:14could be quite a long time many many
1:39:16years
1:39:17right but we're not going to wait until
1:39:19that many many years before reporting we
1:39:21will
1:39:22report let's say monthly or yearly
1:39:24because we need to know what is going on
1:39:27in the business
1:39:29right so
1:39:30we are following this accounting period
1:39:32convention in in
1:39:34saying that the whole life of the
1:39:36business you can actually
1:39:38uh
1:39:40uh express it in in shorter time periods
1:39:43like yearly or even monthly right
1:39:46and the next one is matching convention
1:39:49saying that income earned during an
1:39:50accounting period must be matched with a
1:39:52cost in generating that income so
1:39:55under the matching convention
1:39:57we are talking about income and expenses
1:40:00we are saying that
1:40:02if you have got income
1:40:05you must have got some expenses that you
1:40:07have to earn that income
1:40:10right so that means that if you've got a
1:40:12sale you sold some things to customer
1:40:14right
1:40:15okay in the process of selling you have
1:40:18expenses
1:40:20for example
1:40:21you might have done some advertising
1:40:23before
1:40:24or you need to pay the workers in order
1:40:27to have that sale
1:40:28right or you need to have some um
1:40:32use some machinery or something like
1:40:34that you know you need to drive the
1:40:35vehicle
1:40:37somewhere in order to make that sale so
1:40:39there are
1:40:42costs or expenses
1:40:45that is related to that
1:40:48income
1:40:49so we're trying to match the expenses to
1:40:53earning that income
1:40:54all right huh so that's the matching
1:40:56convention
1:41:00okay now the next day
1:41:02uh after after looking at the
1:41:05conventions and doctrines there we look
1:41:08at the potential limitations of the
1:41:10statement of financial position so now
1:41:12that we have recorded
1:41:14or learned how to to prepare the
1:41:16statement of financial position
1:41:18i want us to
1:41:20be aware that there are some
1:41:24limitations okay the first one
1:41:28the statement of financial position
1:41:29shows asset liability and equity values
1:41:32at a particular point in time
1:41:35okay so
1:41:37these assets liability equity
1:41:40items are
1:41:41may not be representative of other
1:41:43points in time
1:41:46because it only shows those items at one
1:41:49part on one particular day so what
1:41:51happened to the other days
1:41:53unless you you are preparing the same
1:41:56financial position on the other days
1:41:57then you can see what is going on every
1:41:59day right but
1:42:02companies don't normally do that they
1:42:04will prepare the statement of financial
1:42:06position let's say monthly or even
1:42:09yearly so you will know at one point of
1:42:12time so this is one limitation
1:42:15right
1:42:18number two
1:42:19the statement of financial position may
1:42:21not properly reflect the entity's value
1:42:24due to
1:42:26items that generate future benefit or
1:42:29involve future sacrifices not satisfying
1:42:32the definition and or recognition
1:42:34criteria for example human resources
1:42:36okay
1:42:38um
1:42:39let me
1:42:40compare two companies all right company
1:42:43a
1:42:44and company b all right
1:42:46let's say that company a and company b
1:42:49has exactly the same amount of asset
1:42:52liability and equity
1:42:54presented in the statement of financial
1:42:57positions so it looks like
1:42:59that they are of the same value right
1:43:02okay imagine that they have got exactly
1:43:04the same statement of financial position
1:43:06okay yeah
1:43:07but
1:43:09company a has got good workers
1:43:12company b the workers are not so
1:43:14knowledgeable uh maybe they're a bit
1:43:16more careless and things like that so
1:43:19which company actually has got more
1:43:22value even though you may see the same
1:43:25statement of financial position
1:43:27we would normally think company a
1:43:29because the workers are better right but
1:43:33the
1:43:36quality statement our financial position
1:43:39why
1:43:40because we don't
1:43:42we we cannot put a value to it we don't
1:43:45know how much
1:43:47and even if we put the value to it
1:43:49one person thinks that this is value one
1:43:51person thinks it's another value so it's
1:43:52not really very
1:43:54uh verifiable right okay so
1:43:58what i want to
1:44:00make you aware is some things may not be
1:44:03able to be recorded in the statement of
1:44:05financial position and that's one
1:44:07limitation another limitation is that
1:44:09there are historical nature or
1:44:12combination of cost and fair value
1:44:14in the statement of financial position
1:44:16now in the purest form of statement of
1:44:18financial position all the numbers
1:44:21inside there are historical values what
1:44:24actually happened in the past
1:44:26okay and this is what most people
1:44:29did before
1:44:30but increasingly
1:44:33people are
1:44:35starting to
1:44:37question
1:44:38some of these historical values
1:44:40uh
1:44:41yes it actually happened okay but it may
1:44:44not be the most appropriate values
1:44:47uh at some point in the future right so
1:44:50let's say that we are in the future all
1:44:52right this piece of land it was
1:44:54purchased for one million dollars 20
1:44:57years ago
1:44:58and it is still recorded as one million
1:45:00dollars in the in the accounts
1:45:03is it accurate
1:45:04you can say yes or you can say no it is
1:45:07accurate because we bought it for one
1:45:09million dollars
1:45:11but
1:45:11you are preparing the statement of
1:45:13financial position in the year 2022 is
1:45:15the value
1:45:171 million dollars
1:45:20depending on how you look at it yes
1:45:23because we paid 1 million dollars for it
1:45:26no because the value
1:45:28in this day and age is not one million
1:45:31dollars so why are we recording that
1:45:33amount in the state of financial
1:45:34position so
1:45:36some of the items
1:45:38you you have that kind of thing going on
1:45:40yeah
1:45:42and then another limitation
1:45:46is when you prepare the statement of
1:45:48financial position
1:45:51actually in real life it
1:45:53involves management choices for example
1:45:56the method the depreciation there is
1:45:58more than one way of doing depreciation
1:46:02what we're supposed to do is to choose
1:46:03the most
1:46:05um appropriate way
1:46:08right the accounting
1:46:09standards
1:46:11allow more than one way
1:46:13so by right we should choose the most
1:46:15appropriate way but sometimes
1:46:19people might choose the
1:46:22way that it's going to present the
1:46:24numbers in the best possible manner
1:46:27which might not be the most uh
1:46:29uh proper way theoretically okay
1:46:33um
1:46:34numbers in the statement financial
1:46:35position involve judgements
1:46:37okay so let's say that you've got a
1:46:39receivable an amount owing from the
1:46:42customer is it collectible or is it not
1:46:45how do you know whether it's collectible
1:46:47or not you haven't collected it yet
1:46:50right
1:46:51so
1:46:53one person can say oh it is collectible
1:46:55because blah blah blah
1:46:57and another person said oh no this
1:46:59amount
1:47:00is
1:47:01more than one year already it doesn't
1:47:03look collectible
1:47:04so who is right
1:47:06right in
1:47:09uh for student purposes the question
1:47:11will tell you whether it is collectible
1:47:13or not but in real life you have to
1:47:15decide
1:47:16okay
1:47:18and another one is
1:47:20estimation for provision for future
1:47:22liabilities okay so you know that
1:47:26the business is owing money let's say
1:47:28electric bill all right
1:47:31but the bill has not yet arrived but you
1:47:33have already used the electricity how
1:47:36much electricity have we used
1:47:38the bill hasn't arrived yet
1:47:40you have to estimate right
1:47:43how do you estimate
1:47:45maybe you use the previous
1:47:48month electric bill
1:47:50maybe
1:47:52um
1:47:53is it accurate or not but
1:47:55yeah yeah you have to decide so there's
1:47:57some estimations going on all right so
1:47:59this is another limitation of the
1:48:01statement of financial position
1:48:05okay so i
1:48:07think uh this
1:48:08uh are the things that i want to mention
1:48:11okay for this um
1:48:14topic two
1:48:16part one and uh we'll take our
1:48:18discussion a little bit more
1:48:21uh in the tutorial right um as you know
1:48:26uh for topic one uh please look at the
1:48:30review questions all the questions and
1:48:31answers are there so we have to look at
1:48:33it in topic two which we're going to
1:48:36talk about it in the tutorial for next
1:48:37week we are going to
1:48:40actually do
1:48:41transactions and statement of financial
1:48:43position essentialization
1:48:45so uh
1:48:47try to do some preparation
1:48:49okay look at the unit align and
1:48:53do some preparation because
1:48:55uh in one hour it goes by quite fast
1:48:58right so you get more benefit if you
1:49:01come to
1:49:02when you do a little bit of preparation
1:49:04okay so
1:49:05i'll see you uh next week at the
1:49:08tutorial okay so i'll close off the
1:49:11recording now okay online students i'm
1:49:14closing off the recording now
1:49:16so
1:49:18yeah

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