Elements of Financial Statements

Elements of Financial Statements

 Elements of Financial statements are as under

1.    Assets

2.    Liabilities

3.    Expenses

4.    Income

5.    Equity

1.   Assets

Asset is a main element of financial statement. Asset is primarily a resource that is owned & controlled by the organization and risk and reward associated with resource belongs to the entity. Companies are expected to generate future benefit from the asset. Asset is controlled as result of past event. Some important Characteristics of asset are as under

1.    Resource for Company.

2.    Resource controlled by the company.

3.    Risk & reward of resource belongs to company.

4.    Resource would generate future benefit for Company.

There are different asset can be classified into different classes.

1.    Tangible Asset- Physical asset Like plant ,machinery

2.    Intangible asset- non physical asset like goodwill.

3.    Current asset- Expected to generate benefit within/for one year.

4.    Non Current asset- Generate benefit for more than one year. (Plant, machinery)

2.   Liabilities

Liabilities are also important elements of financial statement. Liabilities result or arise due to past event. Company expects an outflow of economic benefit to settle the liabilities. Characteristics of Liability are listed below

1.    Liability arises from past event.

2.    Liability is present obligation.

3.    Liability will require outflow of economic benefit (funds outflow) for settlement.

3.   Expenses

Another important element financial statement is expense. In simplest term company incurred expenses to run the day to day operations. (Manufacturing overheads, salaries, rents). Expenses are deducted from the profit; it means expenses reduce the equity.

Characteristics of Expenses are listed below

1.    Expenses are incurred to run day to day operations.

2.    Expenses are incurred against economic benefit received by company.

3.    Expenses will reduce the equity

4.   Income

Income is another important element of financial statement. Income can be further classified into gross income and net income. Gross income is gross inflow of economic benefit, while net income is net inflow of economic benefit. Net Income increases the equity of the company.

Some important characteristics of income are

1.    Income is Gross inflow of economic benefit like revenue.

2.    Net income is net inflow of economic benefit like profit.

3.    Income increases the equity.

5.   Equity

Another important element of financial statement is equity. In simplest word equity represent the owner investment in the business plus retained earnings.

Paid up capital            100,000

Retained earnings        20,000

Equity                         120,000