Definitions of Assets, Liabilities, and Owners’ Equity

The Financial Accounting Standards Board (FASB) has identified the essential characteristics of assets, liabilities, and owners’ equity. The FASB definitions, which were introduced in the section, “The Basic Concepts of Financial Accounting,” and the summarization below, provide a frame of reference that helps accountants identify the items to be included in the balance sheet. They will be referred to frequently during the remaining discussions in this chapter. For now, note that according to the FASB’s definitions, assets represent future benefits, liabilities represent future sacrifices, and owners’ equity is the residual amount, or difference, between assets and liabilities.

The following pages introduce you to the types of individual assets, liabilities, and owners’ equity to be found on the balance sheets of most business firms. In studying these individual balance sheet items, keep in mind the FASB’s definitions given below.

FASB Definitions of Assets, Liabilities, and Owners’ Equity

Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Equity is the residual interest in the assets of an entity that remains after deducting liabilities. In a business enterprise, the equity is the ownership interest.

SOURCE: Statement of Financial Accounting Concepts No. 6, “Elements of Financial Statements” (Stamford, CT: FASB, 1980).



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