The elements of financial statements

The elements of financial statements are the classes of items contained in the 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 broad classes are termed the elements of financial statements.

 

There are two main groups of elements:

• The first is associated with the measurement of an entity’s financial position: assets, liabilities and equity.
• The second is related to the measurement of performance: income and expenses.

Within these main categories there are sub-classifications. For example, assets and liabilities may be classified by their nature or function in the business of the entity in order to display information in the manner most useful to users for purposes of making economic decisions.

Other events comprise:

• contributions from owners and distributions to owners (shareholders) are not the same as, and need to be distinguished from, other increases or decreases in equity (in other words, net income (loss) as the balance of income and expenses), which is why they are elements even though they are not identified with any particular primary financial statement.
• Proceeds from long-term financing by lenders and repayments of long-term financing to lenders are also not the same as and need to be distinguished from interest expenditure, foreign exchange differences and other increases and decreases in long-term financing, which is also why they are elements even though they are not identified with any particular primary financial statement.

Objective of General Purpose Financial Reporting	Elements of Financial Statements	Description or definition
Economic resource	Asset	A present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits.
Claims against the entity	Liability	A present obligation of the entity to transfer an economic resource as a result of past events.
	Equity	The residual interest in the assets of the entity after deducting all its liabilities.
Changes in economic resources and claims, reflecting financial performance	Income	Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.
	Expenses	Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.
Other changes in economic resources and claims	–	Contributions from holders of equity claims, and distributions to them.
	–	Exchanges of assets or liabilities that do not result in increases or decreases in equity.

Assets

The official definition of assets are defined by IASB’s Framework for preparation and presentation of financial statements are the resources control by the entity as the result of past events and from which the future economic benefits are expected to flow the entity. Right here could mean the right to use or control the physical assets or the intellectual property or it could be linked to the other entity’s obligation to pay or transfer the assets to the entity. For example, the account receivable is the assets of the entity.

Liabilities

The official definition of liabilities define by IASB’s Framework for preparation and presentation of financial statements are the present obligations arising from the past events, the settlement of which is expected to result in an outflow from entity resources embodying economic benefit. The elements of financial statements

Equity

Equity is officially defined by IASB’s Framework for preparation and presentation of financial statements, is the residual interest in the assets of the entity after deducting all its liabilities.

Example: By solving the above definition, Equities = Assets – Liabilities. The good example of Equity are Ordinary Shares Capital and Retained Earnings. That means equity increase or decrease depending on the movement of assets and liabilities. The elements of financial statements

Income or revenue

The official definition of revenues defined by IASB’s Framework for preparation and presentation of financial statement is increase in the economic benefits during the accounting period in the form of inflows or enhancements of assets or decrease of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

The example of revenues is sales revenues from selling of goods or rendering of services, interest incomes from banks deposits, dividend received from equity investments.

Expenses: Operating Expenses or Administration Expenses

The official definition of Expenses defined by IASB’s Framework for preparation and presentation of financial statement is decreased in economic benefits during the accounting period in the form of outflows or depreciation of assets or incurred of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

See also: Presentation of financial statements

The elements of financial statements

The elements of financial statements The elements of financial statements The elements of financial statements