Element of financial statements: Financial accounting generates different types of statements/reports and communicates them to external users so that they can assess the overall performance of the business in financial terms. These reports are overall performance of the business in financial terms. these reports are commonly known as financial statements are formal reports providing information on a company’s financial position, cash inflows and outflows, and the results of operations (Current year net income or net loss).
Many companies publish these statements in the form of an annual report of Element of financial statements.
Accountants ← Prepared by Financial Statements → Presented to External Users
In the form of
Fig: Preparation and presentation of financial statements
The financial statements include the following statements that are usually published in the annual report:
- Income statements (profit & loss account)
- Balance sheet (statement of position)
- Statement of cash flows &
- Statement of changes in owner’s equity
- Notes to financial statements
Among them, income statement and balance sheet are the most significant statements.
The income statement highlights a summary of the revenues earned and expenses incurred by a business over a certain period of time. It results in net profit or loss of the business for the period. The decision makers can assess the performance of the business operation.
The balance sheet gives us a snapshot of the assets and liabilities of the business enterprise on a certain date usually at the end of accounting period. This is nothing but a summary of financial position of the business on a certain date. This is why, the balance sheet is commonly known as a statement of financial position.
3.Statement of cash flows:
The statement of cash flows is such statement, which reports the cash receipts cash payments and net change in cash resulting from operating, investing and financing activities of the business enterprise during a certain period.
4.Statement of changes in owners equity:
The statement of changes in owner’s equity reports the changes in each stockholder’s equity account and in total stockholder’s equity during the year.
5.Notes to financial statements:
Note to financial statements are an integral part of financial statements. These usually include the accounting policies pursued by the company and explanatory notes as to accounting figures put on the face of financial statements.
Element of financial statements
Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. These board classes are termed as the elements of financial statements. The FASB has classified the elements of financial statements as under:
Fig: Element of financial statements
They describe the amount of resources and the claims on the resources on a point of time. They include the following three elements:
Assets are economic resources owned by a business that are expected to benefit future operations. Example: Equipment, land property, accounts receivable etc.
Liabilities are present obligations of a business to pay cash, transfer assets or provide services to other entities in the future. In other words, liabilities are the outsiders creditors claims on economic resources.
c) Owner’s equity:
Owners equity represents the claims by the owners of a business on the assets of the entity. This is what is the residual interest/claim in the assets by the owners of the entity that remains after dedicating the entity’s liabilities, i.e. Owner’s equity = Assets – Liabilities
d) Investment by owners:
Increase in economic resources by capital invested by the owner.
e) Distributions to owners:
Decrease in the economic resources of an entity due to distribution to the owner in the cash or non-cash form.
Revenues are the increases in stockholders equity that result from operating a business.
Expenses are the decreases in stockholders equity that result from operating a business
- when revenues exceed expense, net income results in.
- When expenses exceed revenues, net income loss results in.
Increase in owner’s equity from incidental transactions of an entity during a period except revenue or investments by owners.
Decrease in owner’s equity from incidental transactions of an entity during a period except expenses or distributions to owners.
j) Comprehensive income:
Changes in owner’s equity during a period from non-owner sources (Revenues, gains, expenses & losses) i.e. it does not include investment by owners and distribution to owners.
Comprehensive income = (Revenues + Gains -Expenses -Losses)