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The definition of running or investing in a company has evolved with time. Every decision is taken after ample research. The standing of any company is calculated based on financial statements. With these statements, one can have a clear view of the company’s revenue and expenses. Also, it is an indication of whether the company was able to meet its short-term and long-term financial obligations. In short, it can be called the financial health of the company. So, this financial statement has many elements like Assets, Liabilities, Equity, Investments by owners, Revenues, Expenses, Gains and losses. Let us go through these elements of Financial statements.
Financial accounting and Taxation 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:
- An Income statement or Profit and Loss Statement is a Financial Statement showing the Company’s revenue and expenses for a particular period.
- 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.
- A statement of changes in EQUITY shows the changes in equity of the company during the stated period.
- 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 Analytics courses It has embodied the accrual system of accounting and Taxation courses in its elements that adhere to the financial statements.
The 10 elements included in the Financial Statements are as Follows:-
- Investments by owners
- Distributions to owners
- Comprehensive Income Statement
The following elements of financial statements are discussed below to have a deep insight into their meanings:
Assets are the property or legal rights owned by a business to which monetary 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 their 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.
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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.
Equity represents an ownership interest in a firm in the form of stock. Being precise in accounting terms, 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.
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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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Revenue is the income that a business earns from its normal business activities. It is an inflow of assets, which results in an increase in owner’s equity.
The exchange of goods and services for money consideration is an example of revenue.
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.
Loss is a decrease in owner’s equity from peripherals transactions which are irregular and non-recurrent in nature.
For example, the 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 a financial statement and serves the purpose of revealing and accounting for 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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Q 1. What is a financial statement?
Ans. Financial statements are formal written records of financial transactions that convey the business activities and the financial performance of a company. Important financial data of the company is presented in a structured manner in a financial statement to make it easy to understand.
Q 2. What are the four main financial statements?
Ans. The four main financial statements are balance sheets, income statements, cash flow statements and statements of shareholders’ equity.
Q 3. What are the elements of a financial statement?
Ans. The elements of a financial statement are Assets, Liabilities, Equity, Investments by owners, Distributions to owners, Revenues, Expenses, Gains, Losses and Comprehensive Income Statements.
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