Topic 2: Measurement Concepts and Balance Sheet

Equation

Learning Outcomes

By the end of this topic, you should be able to:

1) Explain the basic assumptions and conventions of financial accounting; and

2) Explain and discuss the nature of generally accepted accounting principles.

Topic Overview

This topic introduces the income statement and balances sheet; the basics of accounting measurement, generally accepted accounting principles, conventional measurement bases, accounting for transactions and the IASB definition and recognition criteria.

Focus Areas and Assigned Readings

	Focus Areas	Assigned Readings
		Walton, P., & Aerts, W. (2020). Global
		financial accounting and reporting
		(4th ed.). Hampshire: South Western
		Cengage Learning.
2.1	The Balance Sheet	Chapter 3, pp 60.
2.2	Company Characteristics	Chapter 3, pp 60-64.
	Affecting Financial Reporting
	Behaviour
2.3	Content of financial statements	Chapter 3, pp 64-26.
2.4	The basics of accounting	Chapter 3, pp 69-70.
	measurement
2.5	Generally accepted accounting	Chapter 3, pp 71-77.
	principles
2.6	Conventional measurement bases	Chapter 3, pp 77-80.

Content Summary

This topic highlights the main components of financial statement i.e. balance sheet and income statement.

2.1) The Balance Sheet

It aims to form an opinion on the economic health and prospects of the company.

2.2) Company Characteristics Affecting Financial Reporting Behaviour

Nature of ownership

Managerial objectives

Nature of activity

Legal form

Company size

2.3) Content of Financial Statements

Statement of Comprehensive Income Statement of Financial Position

Accounting Equation: Assets = Equity and Liabilities

2.4) The Basics of Accounting Measurement

Accounting assumptions and conventions

Data recording process of companies

Accounting equation

Preparation of financial statements

2.5) Generally Accepted Accounting Principles

Generally Accepted Account Principles (GAAP), and true and fair view.

Key basic conventions - Consistency, accrual basis, prudence and going concern.

(a)Consistency - When applying accounting methods to a company, the company must continue to use that particular method for a long period of time.

(b)Accrual basis - Revenue and expense are recognised in the period in which they are incurred.

(c)Prudence - Assets and income are not overstated and liabilities and expenses are not understated.

(d)Going Concern - When a company is established, it is expected that the company intends to continue its business and is able to do so.

2.6) Conventional Measurement Bases

Historical cost - The value of a resource given up or a liability incurred to acquired an asset/service at the time when the resource was given up or the liability incurred.

Fair value - An estimate of the value an entity would realise if it were to sell an asset, or the cost it would pay to relieve a liability.

Monetary measurement unit - All items must be quantified in monetary terms.

2.7) Elements of Financial Statements

Assets are economic resources owned by an entity that are expected to bring future benefit to the entity. Assets can be divided into current and non-current assets.

Equity is the rights against the assets of an entity by the owners.

Liabilities are obligation of an entity to external parties and can be divided into current and long-term liabilities.

Expenses are costs to the assets or services provided in generating the revenue of an entity.

Income is the source of income of an entity such as revenue, sales, fees, commission, interest and so on.

Study Questions

1) Discuss the conflict of a true and fair view.

2)Explain and discuss the conventional measurement bases of a balance sheet.

3)Discuss the elements of financial statements and the interrelationship.