Period Assumption Associates economic activity with time intervals for profit determination and reporting ie. Firstly, lets look at the various categories of accounts necessary to summarise what a business owns, and what the business owes. Assets Assets represent a right to, or expectation of future economic benefit which is controlled by the firm. Some assets such as Cash are assets because we can use them to pay for consumption of other goods and services. Other assets have service potential, which basically means that we can use them in the production process to generate cash flows and profits in the future.
Assets are what the firm owns.
Liabilities Liabilities represent sacrifices of service potential or future economic obligations. Money borrowed from the bank is a liability. If we purchase goods on credit from other firms we incur a liability. The amount of a liability is normally fixed by contract, and must legally be paid regardless of whether our firm makes a profit. Liabilities are what the firm owes to outisders.