What is meant by Economic benefits and how they flow to the entity?

It is easy to understand that entities around the world hold different sets of machinery, plant, equipment, building, land and other kinds of assets through which it offers products or services to its customers and in return earn income and generate cash.

Products are made through different machines and the value these machines and equipment add to raw material is the economic benefit they provide to the entity. Talking about service sector, teachers are able to teach using projectors which make learning and teaching convenient and this convenience in return promise fee from students and attract more students and this is the economic benefit of projector used in an educational environment.

Meaning of economic benefits when taken in context of asset’s definition is the capability or potential of asset to generate cash flows (in form of cash and cash equivalents) for the entity. Asset can generate cash flows either by contributing to cash flow generation or by having the capacity to be readily converted into cash and cash equivalents. As in the above example, manufacturers use machinery to produce item which are ultimately sold for cash and thus machinery helps in generating cash flows.

Future economic benefits in any assets can be rendered by the entity in number of ways. Some of the examples are as follows:

• Asset may be used individually or with other assets in combination to produce goods (inventory or stock) that will be ultimately sold to customers generating cash and cash equivalents
• Asset may be used individually or when used together with other assets to provide services to entity’s customers and helps entity to generate cash flows
• Asset may be used to settle liabilities in kind or by converting into cash
• Asset may be used for exchange purposes to acquire other assets
• Asset may be distributed to the owners of the entity for example at the time of liquidation or paying dividends in the course of business.