{"id":14797,"date":"2019-03-15T18:30:17","date_gmt":"2019-03-15T13:00:17","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=14797"},"modified":"2023-04-05T11:41:50","modified_gmt":"2023-04-05T06:11:50","slug":"elements-financial-statements","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/elements-financial-statements\/","title":{"rendered":"Key Elements of Financial Statements"},"content":{"rendered":"<p>Financial Statements are used for indicating the financial performance and business activities via written <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Accounting&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;Accounting is the language of business, serving as the backbone of financial management and decision-making. It involves the systematic recording, analysis, and reporting of financial(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/accounting\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>accounting<\/a> reports. These are prepared by the management of the company for a certain time period, which is usually a financial year. Examples Elements of financial statements are<\/p>\n\n\n\n<ul><li>Cash Flow\nStatement,<\/li><li>Income\nStatement, <\/li><li>Balance sheet,\netc. <\/li><\/ul>\n\n\n\n<p>The chief aim of preparation of <a href=\"https:\/\/enterslice.com\/financial-statement-audit\">financial statements<\/a> is to keep the owners, shareholders, management, government, and other interested parties informed of the actual financial standing of the company. <\/p>\n\n\n\n<p>Financial\nstatements are integral to every business as they reflect the performance of\nthe organization at any point of time. It is, therefore, important that the\nfinancial statements are prepared very carefully by collecting all the relevant\ndata. Any omission or mistake in the financial statements can mislead the\nmanagement into taking wrong financial decisions for the organization.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What\nForms Complete Set of Financial Statements?<\/h2>\n\n\n\n<p>A\ncomplete set of financial statements for a financial year would include the\nfollowing five statements:<\/p>\n\n\n\n<ul><li>Balance Sheet-\nwhich is a statement of financial position of the company<\/li><li>Income Statement\n&ndash; which is the statement of financial performance of the company<\/li><li>Cash Flow\nStatement<\/li><li>Statement of\nChanges in Equity (reflecting increase or decrease in assets)<\/li><li>Relevant notes\nto financial statements<\/li><\/ul>\n\n\n\n<p>Every\norganization is required to maintain these financial statements at the end of\nevery financial year. The laws pertaining to submission and presentation of\nthese financial statements differ for public and private entities.&nbsp; <\/p>\n\n\n\n<h2 class=\"wp-block-heading\">What are the Key Elements of Financial Statements?<\/h2>\n\n\n\n<p>The\nfinancial statements are prepared on the <a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Basis&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;In finance, the &amp;quot;basis&amp;quot; is a term with several applications, including representing the difference between the spot price and the future contract price of an asset, which is vital in investment(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/basis\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>basis<\/a> of detailed information on the\nfollowing five elements:<\/p>\n\n\n\n<ul><li>Assets<\/li><li>Liabilities<\/li><li>Equity<\/li><li>Income<\/li><li>Expenses<\/li><\/ul>\n\n\n\n<p>Let us now try to explain them in detail:<\/p>\n\n\n\n<ol><li><strong>Assets<\/strong><\/li><\/ol>\n\n\n\n<p>&nbsp;As per the <strong>International Accounting Standards Board (IASB)<\/strong>, &ldquo;<em>an asset is a resource controlled by the\nentity as a result of past events and from which future economic benefits are\nexpected to flow<\/em>.&rdquo; Some vital points in regards to an asset are as follows:<\/p>\n\n\n\n<ul><li>It is not\nnecessarily a physical item.<\/li><li>It may not be\nactually owned by the entity. The benefit from it may be derived as long as it\nis under the control of the entity.<\/li><li>The entity must\nexercise sufficient control over the asset to enjoy its benefits. <\/li><li>For an item to\nbe considered as an asset, it must yield future economic benefits. In case, the\nvalue of an asset for a certain financial period becomes nil, the same shall\nnot be considered to be an asset.<\/li><li>The cost and\nvalue of an asset should be assessable. <\/li><\/ul>\n\n\n\n<p><strong>Examples of Assets<\/strong> &ndash; Goodwill, Patents, Accounts Receivable,\nInventory, Land, Cash in bank, Cash in hand, Prepaid Expenses and such other\nitems that meet the definition of assets. <\/p>\n\n\n\n<p><strong>2. Liabilities<\/strong><\/p>\n\n\n\n<p>These\nare the legal obligations of an entity for paying to another organization or\nindividual. The settlement of liabilities results in decrease in its financial\nresources. Liabilities are of two types:<\/p>\n\n\n\n<p><strong>Current Liabilities<\/strong>: These are the obligations that are expected to get\nsettled within 12 months of their creation date. <\/p>\n\n\n\n<p><strong>Non-Current Liabilities<\/strong>: These are the obligations that get settled in more\nthan 12 months from the date of their creation. <\/p>\n\n\n\n<p><strong>Examples of Liabilities<\/strong> &ndash; Bank Loan, Overdraft, Tax Payable, Interest\nPayable, Salary Payable, etc.<\/p>\n\n\n\n<p><strong>&nbsp;&nbsp; 3.<\/strong> <strong>Equity<\/strong><\/p>\n\n\n\n<p>As\nper <strong>IASB<\/strong>, <em>&ldquo;equity is the residual interest in the assets of the entity after\ndeducting all its liabilities.&rdquo;<\/em> In simple words, equity is the excess of\naggregate assets over aggregate liabilities, for a financial year. Hence, an\nincrease or decrease in equity is dependent upon the movement of assets and\nliabilities of the organization in the financial year. <\/p>\n\n\n\n<p>Equity\n= Assets-Liabilities<\/p>\n\n\n\n<p>Items\nthat form a part of equity are:<\/p>\n\n\n\n<ul><li>Share Capital<\/li><li>Retained\nEarnings\/Loss<\/li><li>Payment of\ndividends<\/li><li><a class=\"glossaryLink\"  aria-describedby=\"tt\"  data-cmtooltip=\"&lt;div class=glossaryItemTitle&gt;Revaluation&lt;\/div&gt;&lt;div class=glossaryItemBody&gt;Revaluation refers to the government or central bank&amp;#039;s deliberate increase in the value of a country&amp;#039;s currency relative to other currencies, often to boost trade and control inflation. This is(...)&lt;\/div&gt;\"  href=\"https:\/\/enterslice.com\/learning\/terms\/revaluation\/\"  data-gt-translate-attributes='[{\"attribute\":\"data-cmtooltip\", \"format\":\"html\"}]'>Revaluation<\/a>\nGain\/Loss<\/li><\/ul>\n\n\n\n<p><strong>  4. Income (Revenue)<\/strong><\/p>\n\n\n\n<p>An\nentity is said to have generated income if any of the following two happen:<\/p>\n\n\n\n<ul><li>There is an\noverall increase in the economic benefits for a financial period. The increase\nmay be in the form of cash inflow or increase in assets.<\/li><li>Reduction in the\ntotal liabilities of the entity, thereby increasing the equity.<\/li><\/ul>\n\n\n\n<p>Accounting\nprinciples used for recording income:<\/p>\n\n\n\n<p><strong>Cash Basis<\/strong>: The income is recognized and recorded when it is\nactually received in cash by the entity.<\/p>\n\n\n\n<p><strong>Accrual Basis<\/strong>: The income is recognized and recorded when it\nbecomes accrued to the organization and may be actually received by the entity\nat a later date.<\/p>\n\n\n\n<p>The\nentity has to uniformly follow an accounting principle for a financial year. <\/p>\n\n\n\n<p><strong>Examples of Income<\/strong>: Sales, income generated from services rendered, interest\nfrom bank deposits, dividend received from investments, etc. <\/p>\n\n\n\n<p><strong> 5. Expenses<\/strong><\/p>\n\n\n\n<p>An\nentity is said to have incurred expenses if any of the\nfollowing two happen:<\/p>\n\n\n\n<ul><li>Reduction in\neconomic benefits during the accounting period via cash outflow<\/li><li>Decrease in\nassets<\/li><\/ul>\n\n\n\n<p>Besides\nthe above two, <em>expenses shall also\ninclude the expenditure incurred on items like wages paid, expenses that occur\nin the normal course of business and other losses that usually do not occur in\nthe ordinary course of business<\/em>. <\/p>\n\n\n\n<p>Expenses\nare recorded in the Profit and Loss account in accordance with the revenue\ngenerated. An expense will automatically be created in the Profit and Loss\naccount when an assets value becomes nil and no future economic benefits are\nexpected from it.<\/p>\n\n\n\n<p>Expenditure\ncan be of following two types:<\/p>\n\n\n\n<p><strong>Capital Expenditure<\/strong>: It is incurred in relation to fixed assets, that\nare expected to yield economic benefits for a long period of time.<\/p>\n\n\n\n<p><strong>Revenue Expenditure<\/strong>: This expenditure is in relation to particular\nrevenue transactions or operating periods. These usually include expenses\nrelated to wear and tear of fixed assets. <\/p>\n\n\n\n<p><strong>Examples of Expenses<\/strong>: Depreciation, Marketing expenses, Interest\nexpenses, Transportation costs, Repairs and maintenance, Utilities expenses,\netc. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Conclusion<\/strong><\/h2>\n\n\n\n<p>Financial\nStatements are integral to any organization and it is pertinent that they are\nprepared and maintained in an efficient manner by complying with all the\napplicable laws. Any misrepresentation or deliberate vital omission is\nconsidered to be a crime under the laws of India. Hence, it is necessary that\nthe correct financial statements are presented to the interested parties.\nActivities such as tax evasion on the basis of misrepresentation of accounts\nshould be completely refrained from.<\/p>\n\n\n\n<p>For any further assistance on preparation of financial statement, accounting principles or recording of financial elements, contact us at <a href=\"https:\/\/enterslice.com\">www.enterslice.com<\/a>. <\/p>\n\n\n\n<p><strong>Also Read:<\/strong><br><a href=\"https:\/\/enterslice.com\/financial-reporting-services\">Financial Reporting Services in India<\/a><br><a href=\"https:\/\/enterslice.com\/learning\/accurate-financial-statements-critical\/\">Why Accurate Financial Statements Are Critical for Businesses?<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Financial Statements are used for indicating the financial performance and business activities via written accounting reports. These are prepared by the management of the company for a certain time period, which is usually a financial year. Examples Elements of financial statements are Cash Flow Statement, Income Statement, Balance sheet, etc. The chief aim of preparation [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":14805,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[11,1314],"tags":[2484],"acf":{"service_id":"230"},"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v14.6.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Key Elements of Financial Statements by Enterslice<\/title>\n<meta name=\"description\" content=\"Management of the company for a certain time period, which is usually a financial year. 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