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Financial statements are written reports of a company’s financial performance and position. These usually consist of the top three ones, the balance sheet, the income statement, and the cash flow statement. As implied by their name, each provides a different aspect of the company’s performance or position. These financial statements also have some elements.
What do the Elements of Financial Statements mean?
The elements of financial statements are the primary components that make up a company’s financial reports. Regardless of the type of company or organization, these elements are common. However, they may differ from one statement to another. On top of that, some have a higher importance than others due to how they work.
Companies can further classify the elements of financial statements into different categories based on the underlying report. In most cases, the components of the balance sheet and income statement are more important than others. The primary reason is that investors focus on these two financial statements due to their importance.
What are the Elements of Financial Statements?
As stated above, there are several elements of financial statements based on the underlying report. Among these, assets, liabilities, equity, income, and expenses are more prominent. The first three relate to the balance sheet, while the others come from the income statement. An explanation of each of these is as below.
Assets are resources that a company owns or controls that result in an inflow of economic benefits in the future. It is the accounting definition for the term. Typically, these resources include tangible or intangible costs that a company has acquired or produced over time and capitalized. These items help the company in running operations or generating revenues.
Some examples of assets include the following.
- Property, plant, and equipment
- Cash and cash equivalents
- Accounts receivable
Liabilities are the opposite of assets. These are obligations arising from past events that result in a probable outflow of economic benefits. In simpler words, it includes money or debt owed to third parties other than owners. Liabilities are one of the primary sources of finance for a company. These are part of a company’s capital structure.
Some examples of liabilities include the following.
Equity includes any part of the business attributable to its owners or shareholders. In accounting, it is the residual interest of shareholders in a company after deducting its liabilities from its assets. Practically, it includes money the owners have contributed to the business and any profits or income attributable to them.
Some examples of equity include the following.
- Share capital
- Share premium
- Retained earnings
Income includes the inflow of economic benefits during a fiscal year. Essentially, it consists of revenues and proceeds from sales and other activities. Income is a part of the income statement and is crucial in calculating profits. Usually, companies generate these from their primary activities, which fall under revenues. However, they may also get income from other sources.
Some examples of income include the following.
- Sales revenue
- Interest income
- Gain on sale of assets
- Rental income
- Royalty income
- Foreign exchange gains
Expenses are the opposite of income and include the outflow of economic benefits during a fiscal year. Primarily, the term refers to costs or expenditures a company incurs to run its operations. Like income, expenses are a part of the income statement and help calculate profits. Companies divide these expenses based on the activities to which they relate.
Some examples of expenses include the following.
- Cost of goods sold
- General and administrative expenses
- Sales and marketing expenses
- Interest expenses
Financial statements are reports of a company’s position and performance. These reports include various elements that are common for all companies. Usually, investors focus on the balance sheet and income statement. The primary elements of these financial statements include assets, liabilities, equity, income, and expenses.
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