Question

In: Accounting

The statement of financial position is one of the major financial statements published by companies. It...

The statement of financial position is one of the major financial statements published by
companies. It reports the company's assets, liabilities and equity at a specific point in time.
Required:
(a) Describe the terms assets, liabilities and equity. Are these terms related? If so, how?

(b) For each of the terms (i.e. assets, liabilities and equity) provide one (1) example. Justify
your choice.

Solutions

Expert Solution

  1. Financial statements are broadly divided into three categories Assets, Liabilities and equity. Assets represent the asset side of balance sheet whereas liabilities and equity represents the Liability side of the balance sheet. These terms are explained as below:

Assets : These are objects and entities which are owned by the company and have economic value. I.e. it must be measurable in money terms.

Liabilities: These are the debts which are payable by the company . Liabilities include both short term and long term liabilities.

Equity: It is the owners financial share in the business. I.e. Profit or loss or any other type of withdrawal or addition by the owner will be reflected in equity section.

These terms are inter related because a change in one section will cause the changes in other as well. Putting it in accounting equation as : Assets= Liabilities+ Equity.

  1. Examples:

Assets: Inventory, Machinery etc.

Liabilities: Creditors, loan from bank etc.

Equity: Profit from business etc.


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