7. Defining an Asset

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Accounting: Principles of Financial Accounting

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IESE Business School

Accounting: Principles of Financial Accounting

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Курс 1 из 5 — Specialization Foundations of Management

Financial Accounting is often called the language of business; it is the language that managers use to communicate the firm's financial and economic information to external parties such as shareholders and creditors. Nobody working in business can afford financial illiteracy. Whether you run your own business, work as a manager or are just starting your career, you want to understand financial information and be able to interact with accountants, controllers, and financial managers. You want to talk business! This course will provide you with the accounting language's essentials. Upon completion, you should be able to read and interpret financial statements for business diagnosis and decision-making. More importantly, you will possess the conceptual base to keep learning more sophisticated accounting and finance on your own. Do not forget that, as with any other language, becoming proficient with accounting requires constant practice.

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Course Overview & Week 1: Introduction to Accounting - The Balance Sheet

Welcome! Before you start today's videos, please have a look at the syllabus. In this first session, I'll give you an overview of what accounting is all about and why it's important to have a basic proficiency in this "language." In addition, I'll introduce one of the most important financial reports - the balance sheet - and a practical real-world case so you can put theory into practice. Objectives: To gain insight into the essence of accounting and become familiar with the balance sheet and its purpose.

1. Accounting: The Language of Business6:17

2. Practice Case: The Campus Bookstore I7:07

3. Practice Case: The Campus Bookstore II3:09

4. Accounting for our First Transactions3:10

5. Accounting for More Transactions5:07

6. Explaining the Balance Sheet7:05

7. Defining an Asset6:04

8. Defining a Liability4:26

Познакомьтесь с преподавателями

Marc Badia
Assistant Professor
Accounting and Control

[MUSIC]

In the balance sheet we find different accounts that can be classified under

assets, liabilities, and owners equity.

To better understand the impact of each transaction on the balance sheet,

it's important to define very well each one of these kind of transactions.

So we're going to start in this video by defining an Asset, so

I'm going to give a precise accounting definition of an Asset.

There are three elements to define an Asset.

First of all, Ownership.

So Ownership or control of the asset is a necessary condition to define an asset.

For example, in the campus bookstore, we purchase the furniture and equipment and

we account the full amount, no matter whether we have paid for it or not.

So we have recognized 25,000 euros of furniture and equipment.

And we own that furniture and equipment.

The second condition is that we expect these assets to generate future benefits.

So it is probable that the asset is going to future benefits.

For example, this furniture and equipment we are going to use it for our operations.

It will help us to sell same with the inventory.

So we have the inventory where those books are going to generate future benefits

whenever we sell them.

And the third condition is that it's a Result of a Past Transaction.

Furniture and equipment we purchase it,

there is an invoice that indicates the amount that this is worth.

And so it's a result of a Result Of a Past Transaction.

Obviously a necessary condition to recognize this assets on our

balance sheet is that first we can estimate the value reliably and

second that the probability of this future benefit is kind of high, it's probable.

With this definition in mind, let's discuss the following examples.

For example first, do you think that the piece of equipment that we purchased for

1 million euros is an asset?

Obviously, it is an asset.

First, we own it.

Second, it's going to generate future benefits for us.

With this machine, we're going to produce products that we're going to sell for

a price.

And finally as the result of a past transaction.

Let's go for a second example.

What do you think about the Diet Coke brand

developed by Coca-Cola internally in their company?

Well, first of all, do they control, do they own this brand?

Of course, second, is it going to generate future benefits?

The answer is yes, as well, thanks to the brand they are selling.

Finally is it the result of a bus transaction?

Well here the answer is negative and

this is why this is not an acid recognize on the balance sheet, why?

Because the Diet Coke brand has been develop over time,

thanks to many different things so it's all the result of a past transaction.

Coca-Cola didn't purchase this brand from any other company.

They developed it internally thanks to advertising, excellence in operations,

in the definition of the product and so on and so forth.

So no matter whether you think this is an asset or

something that is going to generate future benefits, from an accounting perspective.

This is not going to show on the balance sheet of Coca-Cola.

This is actually one of the limitations of accounting.

Third example, the company purchases lottery tickets.

Is this an asset?

Well, in this case this is not an asset.

Sure, first of all the company owns the tickets, it's a result of a past

transaction but probably the future benefit is kind of low.

So this is not an asset that you would recognize on a balance sheet.

Last example employees, do you think employees are asset of a firm?

Well maybe philosophically you thought that the employees

are assets because they generate future benefits for the company.

Look, whatever.

But from an accounting perspective employees are not assets.

First because they are not owned by the company and that's it.

No matter whether the other conditions are met or

not, this is enough to say that employees are not assets.

Talking about employees, let me give you a special case here.

It's a case of a sports clubs.

For example, football clubs.

On the balance sheet of football clubs,

you will see something that is called transfer rights.

It is sort of intangible asset.

And this is the right that the club has of one player playing for the club for

the next few years, for the length of the contract.

Now, if the player has been hired from another club,

where the players still have the contract in place.

The club that is hiring the new player has to pay like certain amount for

the transfer rights.

While this amount, this purchase, is the result of a past transaction.

It gives the right to the club to receive the services of this player for

a certain amount of time for the length of the contract.

And finally it's going to generate future benefits.

The fact that the player's going to play for

this club is going to generate future benefits.

Let's take the example of Football Club Barcelona.

The player Suarez was hired from Liverpool and Barcelona

played transfer rights to Liverpool to have Suarez playing for Barcelona.

Now these transfer rights are recognized as an asset on the balance sheet.

However let's think now about Messi.

Actually Messi was brought up in the school of Football Club Barcelona.

So it was a sort of intangible internal develop like the diet brand Coke.

This is why Messi doesn't show on the balance sheet of Barcelona.

Obviously it's going to generate future benefits.

Barcelona has the right of that player to play for Barcelona.

But it's not the result of a past transaction.

So these are curiosities of accounting.

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