CHAPTER 4 - CONCEPTUAL
FRAMEWORK: ELEMENTS OF
FINANCIAL STATEMENTS
e Financial statements - portray the financial effects of transactions and other events by grouping them
into broad classes according to their economic characteristics.
Elements of financial statements - refer to the quantitative information reported in the statement of
financial position and income statement.
Elements of financial statements - are the building blocks from which financial statements are
constructed
Equity - the residual interest in the assets of the entity after deducting all of the liabilities.
Recognition - a term which means the reporting of an asset, liability, income or expense on the face of
the financial statements of an entity.
Asset - is defined as a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to floor to the entity
Asset recognition principle - An asset is recognized when it is probable that future economic benefits will
flow to the entity and the asset has a cost or value that can be measured reliably.
Future economic benefit - is the potential to contribute to the flow of cash and cash equivalent to the
entity.
Cost principle - requires that assets should be recorded initially at original acquisition cost.
Liability - defined as a present obligation arising from past events the settlement of which is expected to
result in an outflow from the enmity of resources embodying economic benefits.
Liability recognition principle - a liability is recognized when it is probable that an outflow of resources
embodying economic benefits will be required for the settlement of a present obligation and the amount
of the obligation can be measured reliably.
Legal obligations - consequence of a binding contract or statutory equipment
Constructive obligations - arise from normal business practice, custom and a desire to maintain good
business relations or act in an equitable manner
Income - increase in economic benefit during the accounting period in the form of inflow, or increase in
asset or decrease in liability that results in increase in equity, other than contribution from equity
participants
FRAMEWORK: ELEMENTS OF
FINANCIAL STATEMENTS
e Financial statements - portray the financial effects of transactions and other events by grouping them
into broad classes according to their economic characteristics.
Elements of financial statements - refer to the quantitative information reported in the statement of
financial position and income statement.
Elements of financial statements - are the building blocks from which financial statements are
constructed
Equity - the residual interest in the assets of the entity after deducting all of the liabilities.
Recognition - a term which means the reporting of an asset, liability, income or expense on the face of
the financial statements of an entity.
Asset - is defined as a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to floor to the entity
Asset recognition principle - An asset is recognized when it is probable that future economic benefits will
flow to the entity and the asset has a cost or value that can be measured reliably.
Future economic benefit - is the potential to contribute to the flow of cash and cash equivalent to the
entity.
Cost principle - requires that assets should be recorded initially at original acquisition cost.
Liability - defined as a present obligation arising from past events the settlement of which is expected to
result in an outflow from the enmity of resources embodying economic benefits.
Liability recognition principle - a liability is recognized when it is probable that an outflow of resources
embodying economic benefits will be required for the settlement of a present obligation and the amount
of the obligation can be measured reliably.
Legal obligations - consequence of a binding contract or statutory equipment
Constructive obligations - arise from normal business practice, custom and a desire to maintain good
business relations or act in an equitable manner
Income - increase in economic benefit during the accounting period in the form of inflow, or increase in
asset or decrease in liability that results in increase in equity, other than contribution from equity
participants
