Importancia de la formación del profesional en el ámbito de la docencia

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balances of these accounts are extracted from the cash book. While both cash and bank balances could be current assets, sometimes bank balance could be a current liability if the entity has overdrawn its account (i.e., overdraft). We shall discuss overdraft later under current liabilities.

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entity is expected to pay within the next accounting year. We shall discuss accounting for accruals in detail in Unit 8.

(iii) Cash received in advance: Sometimes an entity may receive cash in advance for services to be rendered, or sales to be delivered, at a future date. As the entity has not earned that income until a future date, such income is considered as deferred income and as such it is treated as part of current liabilities. But when the income is earned in the future, the amount is then transferred from liability to sales or revenue.

(iv) Short-term loans: These are short-term credit facilities usually granted by financial institutions to an entity and the repayment term period does not exceed one financial year.

(v) Bank overdraft: Overdraft arises when the entity draws more cash from its bank account than it actually has with the bank because of the pre-arranged and agreed terms between the bank and the entity to overdraw its account whenever necessary. Usually, the entity pays bank charges and interests for using this facility.

(vi) Other current liabilities: These include corporate tax payable, dividend payable, unremitted pension contribution and unremitted employees’ pay as you earn (PAYE).

However, the first two items are not relevant to sole proprietorship and partnership forms of business. Moreover, the portion of long-term liabilities that falls due within one accounting year equally constitutes a current liability. For example, if an entity took a 5% long-term loan of N1 million repayable equally over a period of 10 years, at the end of the first year N100,000 will be regarded as a current liability whereas the balance N900,000 which would fall due after more than one year will be regarded as a long-term liability.

48 3.5 Illustrative Example

This section provides a proforma extract of statement of financial position involving current assets and current liabilities. We shall present an extract of statement of financial position using the following data of EtukNsit as at 30th June, 2016:

N Accrued rent 50,000 Accrued salaries 45,500 Prepaid insurance 22,000

Inventories 550,000

Accounts receivable 214,000 Accounts payable 164,000 Rent receivable 35,000 Bills receivable 12,000 Income in advance 23,800 Bank overdraft 55,000

Cash 23,400

Treasury bills 38,800

Long-term loan 120,000 (N24,000 falling due in December, 2016)

Solution

EtukNsit

Extract statement of financial position as at 30 June 2016

N N N

Non-current assets:

Current assets:

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Inventories 550,000

Accounts receivable 214,000

Bills receivable 12,000

Rent receivable 35,000

Prepaid insurance 22,000

Treasury bills 38,800

Cash 23,400

895,200 Current liabilities

Accounts payable 164,000

Accrued rent 50,000

Accrued salaries 45,500 Income in advance 23,800 Loan due within 1 year 24,000

Overdraft 23,400

330,700

Net Current Assets 1,225,900

Long-term liabilities

Loan due after more than 1 year 96,000

4.0 CONCLUSION

This Unit started off by providing the definitions of assets and liabilities based on the conceptual framework of IASB. Current assets and current liabilities were conceptually examined and supported with the aid of examples.

50 5.0 SUMMARY

Current assets are those assets that their life span or economic-generating capacities expire within one accounting year whereas current liabilities are those liabilities that fall due within one accounting year as they require outflow of assets within one year. Both are presented in the statement of financial position as they are unexpired assets and liabilities.

6.0 TUTOR-MARKED ASSIGNMENT

1. Using five examples, explain the term current assets.

2. What do you understand by current liabilities? Name and explain three examples of current liabilities.

3. Formulate four hypothetical current assets with figures and do the same for current liabilities and then produce an extract statement of financial position.

4. Differentiate accounts payable from accounts receivable.

5. Explain your understanding of prepaid expenses and accrued expenses. In addition, explain the effects on the statement of comprehensive income and statement of financial position.

7.0 REFERENCES/FURTHER READING

Gowthorpe, C. (2014). Business accounting and finance, 3rd edition, Australia: South Western Cengage Learning

Thomas, A. & Ward, A. M. (2012). Introduction to financial accounting, 7th edition, London: McGraw Hill Education

Weetman, P. (2015). Financial accounting: an introduction, 7th edition, Harlow, England:

Pearson Education Limited

51 UNIT 5

LONG-TERM LIABILITIES AND OWNERSHIP EQUITY CONTENTS

1.0 Introduction 2.0 Objectives 3.0 Main Content

3.1 Long-term liabilities and ownership equity 3.2 Long-term liabilities

3.3 Ownership equity 3.4 Illustrative Example 4.0 Conclusion

5.0 Summary

6.0 Tutor-Marked Assignment 7.0 References/Further Reading

1.0 INTRODUCTION

Business entities carry out their business operations by using current assets (see Unit 4) and non-current assets (see Unit 11), a combination of which represents the asset structure in the statement of financial position. But these assets are usually funded through long-term (long-term liability and equity) and short-(long-term (current liabilities – see Unit 4) sources of fund.

These sources of fund combine to represent the financial structure of the statement of financial position. Our emphasis in this Unit is on the long-term sources of fund, which also represents the capital structure of the statement of financial position. However, long-term sources of fund cannot be used interchangeably with long-term liabilities as the former comprises both long-term liabilities and proprietary or ownership interest.

52 2.0 OBJECTIVES

At the end of this Unit, the student should be able to distinguish between long-term liabilities and ownership equity. Similarly, the student should be able to explain the difference between long-term sources of fund and long-term liabilities. The student is also expected to explain what drawings mean and its effects on equity.

3.0 MAIN CONTENT

3.1 Long-term Liabilities and Ownership Equity