The elements of a financial statement

The elements of a financial statement are gotten from the Statement of Financial Position and
the Statement of Profit or Loss. The elements are; Revenue, Expenses, Assets, Liabilities, and
Owners equity.

ASSETS

An asset is a resource with monetary value that an organization, owns or controls with the
expectation of future benefit. A company’s assets are reported on its balance sheet. They are
divided into four categories: current, fixed, financial, and intangible. They are purchased or
created in order to increase the value of a company or to benefit its operations An asset is
anything that can generate cash flow, reduce expenses, or increase sales in the future, whether
it’s manufacturing equipment or a patent.

TYPES OF ASSETS

 Non-current (Fixed asset) asset: – Fixed assets are resources that have a life
expectancy of more than a year, such as plants, equipment, and buildings. As fixed
assets age, an accounting adjustment known as depreciation is made. It distributes the
asset’s cost over time. Depreciation may or may not reflect the loss of earning power
of the fixed asset.

 Current assets: – Current assets are short-term economic resources that will be

converted to cash or consumed within a year. Cash and cash equivalents, accounts
receivable, inventory, and various prepaid expenses are examples of current assets.
While cash is simple to value, accountants must reassess the recoverability of
inventory and accounts receivable regularly. A receivable will be classified as
impaired if there is evidence that it may be uncollectible. Companies may also write
off inventory if it becomes obsolete.

LIABILITIES

A liability is a debt that a person or business has, typically in the form of money. Through the
transmission of economic benefits like money, products, or services, liabilities are eventually
satisfied. The two forms of liabilities are current liabilities and non-current liabilities.

The term “current liabilities” refers to debts that are due to be paid off within a year of the
reporting date. For instance, because they are scheduled to pay an employee in the following
month, the salary payable is categorized as current obligations.

Liabilities with a settlement date of more than one year are referred to as non-current
liabilities. For instance, a bank loan with a term of installments longer than 12 months is
categorized as a non-current liability. The balance sheet is the only place where liabilities
data are kept, and they are the second component of financial statements.

OWNER’S EQUITY
This is the entity’s remaining ownership stake in its assets after all of its liabilities have been
paid. Retained Earnings and Ordinary Share Capital are two excellent examples of equity.
Accordingly, equity can rise or fall based on how assets and liabilities change.

Equities will rise, for instance, if assets are growing and liabilities are staying the same. The
equity will, however, decline if the assets remain constant while the obligations rise.

REVENUE

Revenue is the money made from regular business operations and is calculated by
multiplying the average sales price by the number of units sold. To calculate net income,
costs must be deducted from the top-line (or gross income) figure. Sales is another name for
revenue.

Profits from the sale of goods or the provision of services, interest from bank deposits, and
dividends from equity investments are a few examples of revenues. Revenues are recorded
and recognized in the income statement using two accounting standards. It employs two
different bases: an accrual basis and a cash basis.

Revenues or income based on the cash basis are recorded when cash is received or collected.
Contrarily, when risks and rewards are transferred from sellers to purchasers, revenue or
income is recognized on an accrual basis. The buyer receives ownership of the goods or
services from the seller.

EXPENSES

An expense is a cost that businesses incur in running their operations. Expenses include
wages, salaries, maintenance, rent, and depreciation. Expenses are deducted from revenue to
arrive at profits or losses.

Operating costs are those associated with a business’s core operations, including the cost of
goods sold, administrative costs, office supplies, direct labor, and rent. These are the out-of-
pocket costs associated with regular, everyday activities.

Non-operating expenses have no direct bearing on the primary activities of the company.

Examples frequently given are interest fees and other fees related to borrowing money. These
are costs that don’t relate to a business’s regular operations. These expenses might be from
reorganizing or restructuring, paying interest on debt, or dealing with outmoded inventories.