Elements of Financial Statements

Elements of Financial Statements

Elements of Financial statements are assets, liabilities, expenses, income and equity. These expenses have been briefly explained below

1.   Assets

Asset is one of the most important elements of financial statement. Asset can be defined as resource that is controlled by the organization and risks and rewards of resource is shared by the entity or company. Assets are expected to generate future benefit for the organization. Some important characteristics of asset are listed below

1.    Asset is a Resource for Company.

2.    Resource is controlled by the company.

3.    Risks & rewards of asset/asset belong to company.

4.    Resource would generate benefit for company in future.

Asset can be classified into different categories; some important classes are listed below

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.

Asset have been discussed in my other article i.e. characteristics of assets.

2.   Liabilities

Another important element of financial statement is Liability. Liability can be defined as present obligation arises from the past event, which is to be settled in future.  Some important characteristics of liability are as under

1.    Liability is a present obligation of the company.

2.    Liability arises from the past event.

3.   Settlement of liability would require outflow of economic benefit.

Characteristics of liabilities have been discussed in my other articles i.e. characteristics of liabilities.

3.   Expenses

Expense is also an important element of financial statement. Different kind of expenses is incurred by the organization to run day to day operations.

Some important characteristics of 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

Important characteristics of expenses are discussed in more detail in my other article i.e. characteristics of expenses.

4.   Income

Income is also an important element of financial statements. Income can be broadly divided into gross income and net income.  Gross inflow of economic benefit is known as gross income, 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.

4.    Income is shown in the statement of comprehensive income.

5.   Equity

Another important element of financial statement is equity. Equity can be defined as owner investment in the business plus retained earnings.

Paid up capital            200,000

Retained earnings        50,000

Equity                        250,000