Table of Contents
The definition of running or investing in a company is evolving with time. Every decision is taken after ample research. The standing of any company is calculated based on financial statements. With these statements, a view is available, which is why the revenue and the expenses are. Furthermore, it shows whether the company was able to achieve its short and long-term financial obligations. This means that it is the company’s financial fitness. Therefore this financial statement constitutes many parts like assets, liabilities, equity, investing by owners, revenues, expenses, gains, or losses. Let us go through these elements of Financial statements.
Financial accounting and Taxation accounting is known as the branch of accounting that is for summary, analysis, and reporting purposes of the financial transactions of a business.
One of the outcomes of Financial accounting is the generation of Financial Statements for financial statement users.
The financial statement has the following list of components:
- Income statement — the financial statement that reports income and expenses for a certain period or is generally referred to as a P&L statement.
- Balance sheet—results of account sheet/document of a company’s financial state at a certain period equal assets, liabilities, and equity.
- Equity statement — reflects the equity variations of the company in the defined time frame.
- A statement of cash flows is a document of operation, finance, and investment activities generated by a company.
SFAC 6 in realization of the Generally Accepting Accounting Principles (GAAP), are the governing principles of the 10 elements of financial statements that address the performance of the Student Managing Information Systems program and evaluation of its financial stability. It has encapsulated the concept of accrual accounting and MIS courses in its elements of financial statements.
The 10 elements included in the Financial Statements are as follows:
- Assets
- Liabilities
- Equity
- Investments by owners
- Distributions to owners
- Revenues
- Expenses
- Gains
- Losses
- Comprehensive Income Statement
The above elements of financial statements are discussed below to have a deep insight into their meanings:
1. ASSETS
A business asset may comprise either tangible or intangible property, thus providing a legal right over which a quantifiable value can be attached. It is thus, any resource (economic value) that has value, either fixed or intangible, and is projected to deliver the benefit in the future. Assets can be classified and divided into:
- Tangible Assets: A physical thing/material/item that can be touched and seen comes under Tangible assets.
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Examples – are machinery, furniture, buildings, etc which are physical objects/items.
2. Intangible Assets: Intangible assets are non-physical; therefore, they cannot be touched and are unseen.
Examples – goodwill, patents, trademarks, and many more.
3. Fixed Assets: Assets that are used for at least two accounting years and that profits are distributed over a longer period are non-permanent assets.
4. Current assets: The current assets are assets that are directly convertible into cash and normally absorbed within one accounting period.
Thus, debtors are collated and collected into cash, bills receivable, and many more.
Current assets.
2. LIABILITIES
In the opinion of the IFRS Framework, “A liability is a present obligation of the enterprise arising from past activities, the settlement of which is going to be an outflow from the enterprise of assets incorporating economic benefits.” In comparison, liabilities refer to the debt a business as an enterprise owes to its owners and outsiders. Liabilities are divided into two main categories a) Current Liability and b) Long-term or non-current Liability.
- Current Liabilities – This type of liability refers to the amount to be repaid within the financial year as a Current Liability. Examples of current liabilities are creditors, payables, and bills.
- Non-Current Liabilities – These contain liabilities that are due to be paid over a long period but will not have to be paid immediately. Such as debentures, long-term loans, etc.
3. EQUITY
Shares represent a part of a company in a tangible form of stock. The concept of being exact in accounting is determining the value of assets and the cost of liabilities minus the cost of property and its remained value.
4. INVESTMENT BY OWNERS
It Increases equity when resources are transferred in exchange for ownership interests describing an owner’s contribution to the firm.
The investment by owners represents the shares of the stock of a company in exchange for cash.
5. DISTRIBUTION TO OWNERS
It represents a decrease in equity that results from transfer to owners. Essentially, it determines the owners’ withdrawal from ownership of the firm.
An example of Distribution to Owners includes the payment of a cash dividend by a corporation to its shareholders.
6. REVENUE
Revenue is the income generated by the normal business activities of an organization constituting its growth. Inflows of assets increase the equity of the owner.
The exchange of goods and services for money consideration is an example of revenue.
7. GAINS
Profit occurs as a result of the owner equity additions from infrequent and irregular incidental transactions.
Say, a sale of machinery worth an amount beyond its accumulated depreciation (book cost) leads to a gain for businesses dealing in trades other than that of building and selling machines.
8. EXPENSES
Costs represent gross outgoing expenditures of the company for manufacturing products or providing services to the customers. Cost is recorded in the Profit and Loss Account on a particular day.
9. LOSSES
The loss refers to a decrease in the owner’s equity of organizations from non-perpetual transactions that are peripheral to their actions.
Other than the sale and purchase of equipment, a sale of equipment at a decrease fee than its ebook price (much less depreciation losses) could result in an income.
10. COMPREHENSIVE INCOME
All-inclusive income is the difference using the equity of the business enterprise that is caused by the dealings from non-owner sources. It consists of all adjustments of the net profit other than changes from capital increases by shareholders and shareholders’ dividends.
Purposes of the elements of financial statements:
The elements of financial statements serve specific purposes that benefit financial accounting. Understanding a company’s profit-loss graph, statistical analysis, and economic status is very important to increase the gross output of the business.
- Balance sheet: At a given time, the balance sheet is an essential element of a financial statement and serves the purpose of revealing and accounting for an organization’s financial position. The statement provides an account of the total ownership of the organization and the liabilities of the same. Additionally, the balance sheet clarifies the investments made, making the process more systematic and straightforward.
- Income statement: Financial statements consist of an income statement that reveals the profit and loss of the organization at a given time. This information becomes enormously valuable when various data are grouped to view revenues and expenses.
- Statement of Equity: It is essential to financial statements as it shows the company’s net income.
Benefits of Writing Financial Statements
- Monitoring the financial condition of an organization is very important to ensure good results and output. The fundamentals of financial statements make it easier and more organized. It also provides a clear insight into the financial position of the business.
- Writing proper financial statements forbids wasteful expenses and guarantees preservation and savings. This helps individuals deploy funds into valuable and profitable investments.
- The elements of financial statements like loss, liabilities, and gains make the given statements a decision-making tool. These elements of financial statements make an organization an excellent decision-making tool.
- A statement that reveals a company’s profits and liabilities helps an organization to plan strategy and make the outputs better and more productive.
Elements of financial statements also help in getting business credits for the organization. Financial statements are required for calculating federal tax dues. Thus, they can be useful when it comes to filling out reports for tax obligations. Financial statements, therefore, help in making an enterprise better and more organized.
Recommended Reads
- How to Choose an Accounting Career Path
- What is Business Accounting and Taxation
- Career and Scope of Taxation Courses in India
FAQs
Q1. What is a financial statement?
Ans. Financial statements are official systematic documents of financial records showing the business’s happening and financial events of a business. Structured, financial information of the company is presented in the investors’ book of accounts to increase comprehensibility.
Q 2. What comprises the four basic financial statements?
Ans. The main financial statement categories lie under income statements, balance sheets, cash flow statements, and statements of the shareholders’ equity.
Q 3. What constitutes a financial statement?
Ans. The financial statements consist of the four major parts that are — the balance sheets, the income statements, the statements of retained earnings, and the statement of cash flows.
Q4. Is it possible to find a mentor or a person with expertise to be able to delve into Financial statement analysis?
Ans. You can enroll for the Financial Statements Analyst Course at Henry Harvin. The course is open to anyone willing to expert in Financial Statements Analyst’s composition.
Q5. How much Salary a Financial statements analyst can get?
Ans. The salaries of financial statement analysts range from Rs 3.2 lakhs to Rs 44 lakhs and above annually. Nevertheless, factors like experience, profile, and knowledge describe an appropriate salary for you eventually.
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