Elements and recognition criteria 1. Identify the definition for each of these elements: a. Assets b. Liabilities c. Equity d. Income e. Expenses - A resource - Controlled by the entity - As a result of a past event - From economic benefits are expected to flow to the entity. - A present obligation - Arising from a past event - The settlement of which is expected to result in an outflow of economic benefits. - The residual interest in assets - After deducting all its liabilities. - Increases in economic benefits during the accounting period - In the form of inflows or enhancements of assets - Or decreases of liabilities that result in - Increases in equity - Other than those relating to contributions from equity participants. - decreases in economic benefits during the accounting period - In the form of outflows or depletions of assets - Or incurrences of liabilities that result in - Decreases in equity - Other than those relating to contributions from equity participants.
2. What are the recognition criteria? - A probable flow of economic benefits associated with the item will flow to or from the entity AND - The item has a cost or value that can be measure reliably. 3. Classify the following as either assets, expenses, income or liabilities: a) Wages expense b) A gold ring - asset c) Stationery - expense d) Accounts payable - liability e) Debtors - asset f) Sales - income 4. Identify the IFRS standard you would use to account for each of the following: a) Land held for rentals IAS 40 b) Buildings used by the entity IAS 16 c) Inventory IAS 2 d) Short-term leave entitlements IAS 19 5. How do we account for a transaction or event that does not meet the recognition criteria but is material to users decision making? - Such an event cannot be recognised in the financial statements. That is, you cannot process a journal entry for that event. - However, it would be disclosed in the notes to the financial statements to provide useful information to users and to enable informed decision making.
Activity merchandise transactions 1. Dion purchased stock for $300 on credit. DR Stock $300 (Asset increase) CR Creditors (A/P) $300 (Liability increase) 2. At the end of the month, he paid the creditor $300 for the stock purchased. 3. Dion sold stock to Angela, a customer, for $500 cash. The stock originally cost Dion $300. DR Creditors (A/P) $300 (Liability decrease) CR Cash $300 (Asset decrease) DR Cash $500 (Asset increase) CR Sales $500 (Equity increase) DR COGS $300 (Equity decrease) CR Stock $300 (Asset decrease) 4. Angela decided to return $50 worth of stock which originally cost Dion $30. DR Sales Return $50 (Equity decrease) CR Cash $50 (Asset decrease) DR Stock $30 (Asset increase) CR COGS $30 (Equity increase) 5. Mary, another customer purchased stock for $500 on credit. This originally cost $300. DR Debtors (A/R) $500 (Asset increase) CR Sales $500 (Equity increase)
DR COGS $300 (Equity decrease) CR Stock $300 (Asset decrease) 6. At the end of the month, Mary paid for her credit purchase of $500. 7. Another customer who purchased $500 of stock on credit decided to settle his account early. As a thank-you Dion offered the customer a $25 discount. 8. Dion performed a stock-take and found that inventory on the floor was $25 less than what was recorded in the system. DR Cash $500 (Asset increase) CR Debtors (A/R) $500 (Asset decrease) DR Cash $475 (Asset increase) DR Discount Expense $25 (Equity decrease) CR Debtors (A/R) $500 (Asset decrease) DR Stock loss $25 (Equity decrease) CR Stock $25 (Asset decrease)
Activity Balance day adjustments - transactions and events Date Item name Element or Debit / Credit Amount ($) 01/06/2016 Cash Asset Debit $25,000 01/06/2016 Capital Equity Credit $25,000 Jenny, the owner, puts $25,000 cash into her business 'Great Designs'. 01/06/2016 Prepaid Rent Asset Debit $2,400 01/06/2016 Cash Asset Credit $2,400 Great Designs rents a small shop for $800 per month. Pays for the first 3 months with cash. 03/06/2016 Equipment Asset Debit $18,000 03/06/2016 Cash Asset Credit $7,000 Accounts Payable / 03/06/2016 Creditors Liability Credit $11,000 Purchases $18,000 of equipment. Pays $7,000 in cash and the rest is purchased on credit. 04/06/2016 No transaction to record. 05/06/2016 No transaction to record. 06/06/2016 Stock Asset Debit $15,000 06/06/2016 Cash Asset Credit $5,000 Accounts Payable / 06/06/2016 Creditors Liability Credit $10,000 Buys $15,000 worth of stock. Pays $5,000 in cash and the rest is on credit.
15/06/2016 Cash Asset Debit $5,000 15/06/2016 Unearned Revenue Liability Credit $5,000 Simon places a $10,000 order that will cost $8,000 to complete. $5,000 cash deposit received. 30/06/2016 Unearned Revenue Liability Debit $5,000 30/06/2016 Accounts Receivable Asset Debit $5,000 30/06/2016 Sales Revenue Equity Credit $10,000 30/06/2016 Cost of Goods Sold (COGS) Equity Debit $8,000 30/06/2016 Stock Asset Credit $8,000 The order for Simon is completed and despatched along with an invoice. 30/06/2016 Utilities Expense Equity Debit $1,000 30/06/2016 Cash Asset Credit $1,000 The business pays $1,000 for her utility bills with cash. 30/06/2016 Wages Expense Equity Debit $4,000 30/06/2016 Cash Asset Credit $4,000 The business pays Jenny $4,000 cash for wages. 30/06/2016 Accounts Payable / Creditors Liability Debit $3,000 30/06/2016 Cash Asset Credit $3,000 The business pays off $3,000 of the equipment purchase with cash. 30/06/2016 Rent expense Expense Debit $800 30/06/2016 Prepaid rent Asset Credit $800 Great Designs rents a small shop for $800 per month. Pays for the first 3 months with cash. 30/06/2016 Depreciation Expense Debit $150 30/06/2016 Accumulated depreciation Negative Asset Credit $150 Depreciation expense for 1 month. (18,000/10) x 1/12