CHAPTER 5 Balance sheet 1975.11 Discuss the limitations of the balance sheet.
When analysing the financial numbers on the balance sheet, it is necessary to consider issues
associated with the preparation of the statement that potentially limit the inferences made.
The balance sheet is a historical snapshot of the entity’s economic resources and obligations
at a point in time only, and this may not be representative of its resources and obligations
throughout the reporting period. Further, the balance sheet does not represent the value of the
entity. This is due to the existence of assets and liabilities that are not reported on the balance
sheet and the measurement systems used to recognise assets and liabilities. Finally, the defi-
nition and recognition of items on the balance sheet involve management choices, estimations
and judgements.Key terms
Accounting policies Rules and practices, having substantial authoritative backing, that are recognised
as a general guide for financial reporting.
Accumulated depreciation Total depreciation charges for a particular asset.
Agricultural assets (biological assets) Living animals or plants.
Allowance for doubtful debts Estimate of the amount of accounts receivable expected to be
uncollectable.
Asset A resource controlled by the entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
Balance sheet Statement that reports on the assets, liabilities and equity of an entity at a particular
point in time.
Carrying amount (book value) Dollar value assigned to an asset or liability on the balance sheet.
Cash and cash equivalents Cash held at bank, on hand and in short-term deposits.
Classes Different types of asset, liability and equity accounts found on the balance sheet.
Comparative information Presentation of the financial statements of an entity for multiple years.
Conceptual Framework Document that sets out the objective of financial statements, assumptions
underlying financial statements, and the qualitative characteristics of financial statements, and defines
the elements of financial statements and the recognition criteria applied to the elements.Contingent Existence of an asset or liability arising from a past event that may be confirmed only by
uncertain future events not controllable by the entity.
Contributed capital Funds contributed to a partnership or sole trader by the owner(s).
Current assets Cash and other assets that are expected to be converted to cash or used in the entity
within one year or one operating cycle, whichever is longer.
Current cost Cost of replacing an asset or settling a liability today.
Current liabilities Obligations that can reasonably be expected to be paid within one year or one
operating cycle.
Depreciable assets Non-current assets with limited useful lives.
Depreciation Allocation of the depreciable amount of a depreciable asset over its estimated useful life.
Derivative financial asset Financial asset whose value depends on the value of an underlying security,
reference rate or index
Derivative financial liability Financial liability whose value depends on the value of an underlying
security, reference rate or index.
Duality Describes how every business transaction has at least two effects on the accounting equation.
Equity The residual interest in the assets of the entity after all its liabilities have been deducted.
Fair value The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Faithful representation Information that is complete, neutral and free from error.