1 To obtain financing for her hair salon Valeri asked you to

1. To obtain financing for her hair salon, Valeri asked you to prepare a balance sheet for her business. When she sees it, she is disappointed that the assets exclude a value for her list of loyal customers. What can you tell her to explain why this \"asset\" has been excluded? Knowing this, what should she tell her banker when they meet next weck? e

Solution

1. For answering this question first we have to focus on the definition of an asset. What are assets? Assets are the Resources CONTROLLED BY THE ENTITY, arising as a result of PAST EVENTS and FUTURE ECONOMIC BENEFITS are expected to flow to the entity and COST should be MEASURED RELIABLY. For any asset to be determined in the books, all of the above conditions should be satisfied.

Now, coming to the present scenario, Valerie wants to determine the Customers as assets. She cannot do so. Here are the reason:

i) Customers can not be CONTROLLED by the entity and hence cannot be called as asset.

ii) Although Fututre Economic Benefits are expected from loyal customers but the amount of benefit cannot be measured reliably. There is no source of determining such costs.

Since there is breach in the conditions mentioned, she cannot determine customers as an asset.

She cannot quantify the assets so instead of recognising customers as asset she can mention about the goodwill of the business she is carrying on.