Financial accounting is the branch of accounting that is concerned with the summary, analysis, and reporting of financial transactions relating to a business.

The end product of Financial accounting involves the preparation of Financial Statements for the users of accounting information.
A financial statement includes the following:

  1. An Income statement or Profit and Loss Statement is a Financial Statement showing the Company’s revenue and expenses for a particular period.
  2. A Balance Sheet is a statement of financial position indicating a company’s assets, liabilities, and owner’s equity at a given point in time.
  3. A statement of changes in EQUITY shows the changes in equity of the company during the stated period.
  4. A cash flow statement is a summary of cash receipts and cash payments from the operating, financing, and investing activities of a company.  


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Elements of Financial Statements

Statement of Financial Accounting Concepts (SFAC) 6 , governed by Generally Accepted Accounting Principles (GAAP), encompasses 10 elements of financial statements which mainly focus on measuring the performance and ascertaining the financial position of the business enterprise. It has embodied the accrual system of accounting in its elements that adhere to the financial statements.

The 10 elements included in the financial statements are as follows:-

  1. Assets
  2. Liabilities
  3. Equity
  4. Investments by owners
  5. Distributions to owners
  6. Revenues
  7. Expenses
  8. Gains
  9. Losses
  10. Comprehensive Income Statement

The following elements of financial statements are discussed below to have a deep insight into their meanings

1. ASSETS


Assets are the property or legal rights owned by a business to which money value can be attached. In other words, it is an item of economic value that is expected to yield a benefit in the future. Assets can be classified into:

i. Tangible Assets
Tangible Assets are those assets that have physical existence i.e. they can be seen and touched.
Examples of tangible assets are machinery, furniture, building, etc.
ii. Intangible Assets
Intangible assets are those assets that do not have physical existence i.e. they cannot be touched and seen. Examples of intangible assets are goodwill, patents, trademarks, etc.
iii. Fixed Assets Fixed Assets are those assets that are put to use for more than one accounting period and its benefit is derived over a longer period.
For example, computers, machinery, land, etc.
iv. Current assets
Current assets are the assets that are readily convertible into cash and generally absorbed within one accounting period.
For example, debtors exist to convert them into cash, bills receivable, etc.

2. LIABILITIES


According to IFRS Framework, “A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits”. In other words, liability is the amount owed by the business to the proprietor and to the outsiders. Liabilities are generally categorized into 2 broad categories i.e. Current Liabilities and Non-Current Liabilities.

i. Current Liabilities It refers to those obligations or payments which are repayable during the current financial year. Examples of current liabilities are Creditors, bills payable.
ii. Non-Current Liabilities It comprises of those payments which are due for payment over a long period of time and there is no need to discharge it immediately. For example Debentures, long term loans, etc.

3. EQUITY
Equity represents an ownership interest in a firm in the form of stock. Being precise in the accounting terms, it is the difference between the value of assets and the cost of liabilities of something owned. It is mainly a residual amount adjusted by the assets against liabilities.


 
 Equity= Assets – Liabilities

4. INVESTMENT BY OWNERS


It depicts an increase in equity resulting from the transfer of resources in exchange for an ownership interest. It basically describes an owner’s contribution to the firm.
The issue of ownership shares of stock by a company in exchange for cash represents an investment by owners.

5. DISTRIBUTION TO OWNERS
It represents a decrease in equity which results from transfer to owners. It determines the owners’ withdrawal from the ownership interest of the firm.
A cash dividend paid by a corporation to its shareholders is an example of distribution to owners.

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6. REVENUE


Revenue is the income that a business earns from its normal business activities. It is an inflow of assets, which result in an increase in owner’s equity.
Exchange of goods and services for money consideration is an example of revenue.

7. GAINS
Gain is an increase in owner’s equity from peripheral transactions which are irregular and non-recurrent in nature.
For example, the Sale of machinery for an amount greater than its book value (original cost less depreciation) would result in a gain for an enterprise that is engaged in the business other than that of sale and purchase of machinery.

8. EXPENSES


Expenses are the gross outflows incurred by the business enterprise for generating revenues. An expense is charged to Profit and Loss Account.

9. LOSSES
Loss is a decrease in owner’s equity from peripherals transactions which are irregular and non-recurrent in nature.
For example, Sale of machinery for an amount lesser than its book value (original cost less depreciation) would result in a gain for an enterprise that is engaged in the business other than that of sale and purchase of machinery.

10. COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business enterprise from transactions from non-owner sources. It includes all changes in equity of an enterprise other than those resulting from investments by owners and distributions to owners.

Purposes of the elements of financial statements.

The elements of financial statements serve specific purposes that benefit in 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: A balance sheet is an essential element of financial statement and serves the purpose of revealing and accounting an organization’s financial position at a given time. The statement provides an account of total ownership of the organization and the liabilities of the same. The balance sheet also clarifies the investments made, thereby making the process more straightforward and more systematic. 
  • Income statement: Financial statements comprise an income statement that reveals the profit and loss of the organization at a given time. This information becomes exceedingly valuable when various data are grouped to view revenues and expenses. 
  • Statement of Equity: It is an essential element of financial statements as it shows the net income of the company.

Benefits of writing financial statements.

  • Monitoring the financial status of an organization is very important to ensure good results and output. The elements of financial statements make it easier and more organized and provide a clear insight into the financial position of the business.
  •  Writing proper financial statements prevent wasteful expenditures and, thus, guarantee preservation and savings. This helps individuals to deploy funds into valuable and profitable investments.
  • The elements of financial statements like loss, liabilities, and gains make the statements a decision-making tool. These elements of financial statements make them an excellent decision-making tool. 
  • A statement that reveals a company’s profits and liabilities helps them to plan strategy and make the outputs better and more productive. 

Elements of financial statements also help in getting credits for the business. Financial statements are required for calculating federal tax dues. Thus, they are beneficial when it comes to filling out reports for tax obligations. Financial statements, therefore, help in making an enterprise better and organized. 


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What are the basic financial statements?

The basic financial statements of an enterprise include the
1) balance sheet (or statement of financial position),
2) income statement,
3) cash flow statement, and
4) statement of changes in owners’ equity or stockholders’ equity. The balance sheet provides a snapshot of an entity as of a particular date.

What is financial statement example?

The primary financial reports are: the profit and loss statement, balance sheet and statement of cash flow. … Using this information, you can figure out how to prepare several examples of financial statements: Sales: $3,200,000. Cost of goods sold: $1,920,000.

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