10 ELEMENTS OF FINANCIAL STATEMENTS

10 ELEMENTS OF FINANCIAL STATEMENTS

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 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 which 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 which 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 which 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 which are put to use for more than one accounting period and its benefit is derived over a longer period.
For example, computer, machinery, land, etc.
iv. Current assets
Current assets are the assets which 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 categorised 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 ownership interest in a firm in the form of stock. Being precise in the accounting terms, it is the difference between value of assets and 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 transfer of resources in exchange of an ownership interest .It basically describes any owner’s contribution to the firm.
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 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, Sale of machinery for an amount greater than its book value (original cost less depreciation) would result in a gain for an enterprise which is engaged in the business other than that of sale and purchase of machinery.

8. 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 which 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.



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