Chapter 2

• Assets, Liabilities, Equity


  elements directly related to the measurement of financial position
• Income, Expenses


  elements directly related to the measurement of financial performance
• Asset


  a present economic resource controlled by the entity as a result of a past event
• Economic resource


  the right that has the potential to produce economic benefits
• Economic resource


  entitlement to a benefit that is quantifiable in terms of money
• Right


  entitlement or justified claim to something
• Economic benefits


  benefits that we can quantify in terms of the money it generates
• Potential


  assets have the capacity or ability to generate economic benefits
• A right can meet the definition of an economic resources even if the probability that will produce economic benefit is low.
• Present


  economic resource must physically exist or held as of the moment
• Control


  the present ability to direct the use of economic resources and obtain the economic benefits that may flow from it
• Characteristics of asset

  • present economic resource
  • the right that has the potential to produce economic benefits
  • controlled by the entity as as result of a past event
• Liability


  a present obligation to transfer an economic resource as a result of a past event
• Characteristics of a liability

  • has an obligation
  • obligation to transfer an economic resource
  • an obligation must be a present obligation that exists as a result of a past event
• Obligation


  a duty or responsibility that an entity has no practical ability to avoid
• Types of obligation

  • legal obligation
  • constructive obligation
• Legal Obligation


  a consequence or a binding contract
• Consequence of a binding contract


  an entity may create a contract/agreement with another entity to supply the former economic resources to be transferred back
• Constructive obligation


  rise from a normal course of business and a desire to maintain good business relations or act in an equitable manner
• Transfer of an economic resource

  • obligation to pay cash
  • obligation to pay non cash resources like goods
  • obligation to provide service at some future time
• result of a past event (liability)


  the entity has already obtained economic resource from another party
• Equity


  claims on the residual interest in the assets of the entity after deducting all its liabilities
• Income


  increases in assets or decreases in liabilities resulting in increases in equity
• Revenue


  arises in the course of ordinary regular activities
• Gains


  do not arise in the course of ordinary regular activities
• Expenses


  decreases in assets or increases in liabilities resulting in decreases in equity
• expenses


  can arise in the course of ordinary regular activities
• losses


  do not arise in the course of ordinary regular activities
• Articulation


  the first group, affected by elements of the second group, provides at any time cumulative result of all changes.
• articulation


  one financial statement correspond to balances in another
• Five Basic Assumption

  1. economic entity
  2. going concern
  3. monetary unit
  4. periodicity
  5. accrual basis of accounting
• economic entity


  a company keeps its activity separate and distinct from its owners and any other business unit
• going concern


  company will have a long life despite numerous business failure, companies to last long enough to fulfill their objectives and commitments
• current classification


  within one year
• noncurrent classification


  more than one year
• Liquidation


  the process by which a reporting entity concerts its assets to cash or other assets and settles its obligation
• monetary unit


  two aspects namely quantifiability and stability of peso
• quantifiability 


  elements should be stated in terms of a unit of measure which is peso
• stability of peso


  purchasing power of the peso is stable or constant and that its instability is insignificant and therefore may be ignored
• inflation


  rise in prices, decline of purchasing power