Unit 2 accounting

LESSON 2. ASSETS, LIABILITIES ANDEQUITY: THE ACCOUNTINGEQUATION

Fundamentos de Contabilidad

START!

7.1

EQUITY COMPONENTS

3.

COMPONENTS OF THE BALANCE SHEET

6.3

CURRENT LIABILITIES

6.2

NON-CURRENT LIABILITIES

6.1

HOW LIABILITIES WORK?

5.2

CURRENT ASSETS

5.1

NON-CURRENT ASSETS

INDEX

1.

DEFINITION OF THE BALANCE SHEET

2.

HOW BALANCE SHEET WORKS

4.

THE ACCOUNTING EQUATION

5.

ASSETS

6.

LIABILITIES

7.

EQUITY

BALANCE SHEETS PROVIDE THE BASIS FOR COMPUTING RATES OF RETURN FOR INVESTORS AND EVALUATING A COMPANY´S CAPITAL STRUCTURE.

BALANCE SHEET

1. DEFINITION

THE BALANCE SHEET IS A FINANCIAL STATEMENT THAT REPORTS A COMPANY´S ASSETS, LIABILITIES AND SHAREHOLDER EQUITY AT A SPECIFIC POINT IN TIME. IT SHOWS THE COMPANY´S FINANCIAL POSITION AT A GIVEN DATE. FROM A FINANCIAL POINT OF VIEW THE BALANCE SHEET REPRESENTS FINANCIAL RESOURCES RECEIVED EITHER FROM SHAREHOLDERS (EQUITY) OR FROM EXTERNALAGENTS (LIABILITIES) THAT ALLOW THE FIRM TO MAKE THE NECESSARY INVESTMENTS (ASSETS) IN ORDER TO BE ABLE TO DEVELOP ITS BUSINESS.

2. HOW BALANCE SHEET WORKS

The balance sheet provides an overview of the state of a company's finances at a moment in time. On its own, it doesn’t provide a clear picture of long-term trends. Therefore, it’s essential to compare the balance sheet with those from earlier periods. This context can help illuminate changes over time.

Investors can get a sense of a company's financial well-being by using a number of ratios that can be derived from a balance sheet, including the debt-to-equity ratio and the acid-test ratio, along with many others. The income statement and statement of cash flows also provide valuable context for assessing a company's finances, as do any notes or addenda in an earnings report that might refer back to the balance sheet.

The balance sheet adheres to the following accounting equation, with assets on one side, and liabilities plus shareholder equity on the other, balance out:ASSETS = LIABILITIES + SHAREHOLDER’S EQUITYThis formula is intuitive. That's because a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholder equity).

3. THE ACCOUNTING EQUATION

2. CURRENT LIABILITIES

1. NON-CURRENT LIABILITIES

2. CURRENT ASSETS

1. NON-CURRENT ASSETS

4. COMPONENTS OF THE BALANCE SHEET

ASSETS

LIABILITIES

SHAREHOLDER EQUITY

We can classify them in two groups:

• Current assets: resources that a company expects to convert into cash, sell, or consume within one year or within the normal operating cycle, whichever is longer (high liquidity
• Non-current assets: resources that are expected to provide economic benefits over a period longer than one year (less liquidity)

5. ASSETS

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An asset is a source of future economic benefits controlled by a reporting entity as a result of past events or transactions:

• Something a company owns

• Something that has future economic value
• Something resulting from a past transaction or event

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Assets that represent future tax benefits resulting from overpaid taxes or temporary differences between accounting income and taxable income

Assets that represent equity stakes held by a company in other firms, intended to be held for over a year.

4. Long-term investments in subsidiaries and associated companies

6. Deferred tax assets

5.1 Non-current assets

1. Intangible assets

Assets without physical substance that are held for use in the production or supply of goods or services or for administrative purposes and which are expected to be used during more than one period.

2. Tangible fixed assets

Assets of physical substance that are held by an enterprise for use in the production or supply of goods or services or for administrative purposes andwhich are expected to be used during more than one period

3. Investment property

Real state (land and buildings) being held to: earn rentals, for capital appreciation, or both, rather than for use in production or supply of goods or services, or for administrative purposes, or for sale in the ordinary course ofbusiness. They generate cash-flows that are largely independent from the entity’s other assets.

5. Long-term financial investments

Assets held by a company for more than one year, typically including stocks, bonds, or other securities, intended to generate income or capital appreciation over time.

Accruals appear when revenues or expenses are allocated to the reporting period coming to an end but cash will be received in the next year and the company may not recognize the right to receive cash (accounts receivable) or the obligation to pay (accounts payable).

Assets that a company holds for a period of less than one year, typically including stocks, bonds, or other securities, with the intention of generating quick returns or liquidity.

5. Short-term financial investments

6. Accrual accounts

7. Cash and cash equivalents

5.2. Current assets

1. Non-current assets held for sale

They are non-current assets that are available for inmediate sale and which sale must be highly probable

2. Inventories

Assets held, either for sale in the ordinary course of business, in the process of production for such sale, in the form of materials or supplies to be consumed in the production process or in the rendering ofservices.

3. Trade accounts receivables and other receivables

Include assets like trade accounts receivable, receivables from affiliated companies, employee receivables, etc.Trade accounts receivable represents amounts due from customers arising from transactions in the ordinary course of business.

4. Short-term investments in subsidiaries and associated companies

assets held by a company for less than one year, representing equity stakes in other firms that are intended to be quickly liquidated or converted into cash.

Valuation criteria of assets.

For trade accounts we use the nominal value: (value of the invoice).For short-term financial investment we use the fair value because as it is short-term (a period up to one year) we cannot use them to control.For inventories we use the FIFO (first in first out) and the WAC (Weight Average Cost).

For intangible assets, tangible assets and investment property:

• Acquisition value: price in invoice plus other expenses before putting into operation (we include all the expenses needed for the acquisition to be productive except the VAT tax).
• Production cost: Raw materials cost plus direct costs and a proportion of indirect costs.

For long-term financial investment:

• If it is speculative we use fair value rational and unbiased estimate of the potential market price of a asset (price + transaction costs); for example buying shares of another company to sell them later and obtain profit.
• If it is for control we use the acquisition cost; buying 51% of the shares of a company to have control over it.

Fair value changes every year vs Acquisition cost does not change.

Liabilities are the opposite of assets. They refer to things that you have to borrowed

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6.LIABILITIES

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A liabilities is something that a person or a company owes, usually a sum of money.Liabiities are settled over time though the transfer of economic benefits including money, goods or services. They are recognised in the right side of the balance sheet.

Accrual accounts include accounts payable, accounts receivable, accrued tax liabilities, and accrued interest earned or payable among many others. that are owed

5.Long-term accrual accounts

6.2 NON-CURRENT LIABILITIES

1.Long-term provisions

Liabilities that a company expects to settle or discharge beyond one year from the reporting date. These provisions are set aside to cover anticipated future expenses or obligations, such as warranties, legal claims, restructuring costs, or environmental remediation.

2.Long-term debt

Long-term debt is debt that matures in more than one year. Entities choose to issue long-term debt with various considerations, primarily focusing on the timeframe for repayment and interest to be paid.

3.Long-term debt payable to subsidiaries and associated companies

Debts - whose maturity will occur in a period of more than one year, contracted with group companies, jointly controlled companies, associates and other related parties, including accrued interest with a maturity of more than one year.

4.Deffered tax liability

Listing on a company's balance sheet that records taxes that are owed but are not due to be paid until a future date. The liability is deferred due to a difference in timing between when the tax was accrued and when it is due to be paid.

Non-Current liabilities ar long-term, the are expected to last 12 months or longer.

6.1 How liabilities works?

A liabilitiy is generally an obligation between one party and another that´s not yet completed or paid.

Liabilities are categorized as: Current Liabilities or Non-Current Liabilities, depending on their temporality.

Current liabilities are usually considered short-term. They are expected to be concluded within 12 oaths or less.

6.3 CURRENT LIABILITIES

1.Liabilities linked to non-current assets held for sale

Debts with related parties as suppliers of goods defined in group 2, including those formalised in draft bills whit a maturity of less than one year

2.Short-term provisions

Liabilities earmarked by a company to cover anticipated expenses or obligations expected within the next twelve months.

3.Short-term debt

Debts - whose maturity will occur in a period of less or equal than one year, contracted with group companies, jointly controlled companies, associates and other related parties, including accrued interest with a maturity of more than one year.

4.Short-term debt payable to subsidiaries Anne associated cpmmpanies

Short-term debt, also called current liabilities, is a firm's financial obligations that are expected to be paid off within a year.

6. Short-term accrual accounts

6.3 CURRENT LIABILITIES

5. Trade account payable and other payable

Trade payables constitute the money a company owes its vendors for inventory-related goods, such as business supplies or materials that are part of the inventory. Accounts payable include all of the company's short-term obligations.

Short-term accruals are the amount of revenues or expenses that have been received or incurred, respectively, but have not yet been paid for and remain on the balance sheet for less than a year after the date of the balance sheet.

7. EQUITY

Shareholder equity (SE) is a company's net worth and it is equal to the total amount of capital that would be returned to the shareholders if the company must be liquidated and all its debts are paid off. Thus, shareholder equity is equal to a company's total assets minus its total liabilities.SE is a number that stock investors and analysts look at when they're evaluating a company's overall financial health. It helps them to judge the quality of the company's financial ratios, providing them with the tools to make better investment decisions.Retained earnings are part of shareholder equity as is any capital invested in the company.

Shareholder Equity = Total Assets − TotalLiabilities

A grant is a non-cash compensation given to someone, giving them a percentage of ownership to a company. An equity donation solidifies your company's commitment to social impact in a lasting way by helping you generate funds to support grant making for years to come.A legacy is a money received from a non-profit organization's liabilities.

3. Grants, donations and legacies received

2. Adjustment for changes in value

7.1 EQUITY COMPONENTS

1. Shareholder´s equity

A company's net worth or the total dollar amount that would be returned to its shareholders if the company is liquidated after all debts are paid off.

The difference for any year between the then current fair cash value and the base year valuation.

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LUCIA LÓPEZ, LUCIA MILLAN & MARIA FERNANDA VITORIQUE

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