The elements of financial statements are essential parts that makes up a financial statement. These elements of financial statements are the major build up of it.
The financial statements of a company are vital reports that provide financial information to be used by stakeholders, investors, creditors, management and as many as may be interested in the Entity.
As a manager, having a good understanding of financial statement is essential because it is what represents your entity. If there is a misrepresentation on it, it could affect the entity’s possible investors. There are some format and rules that guide the preparation of financial statements and if not properly followed , may depict an adverse impression on one reading it.
There are five Elements of financial statement as follows:
- Asset: Assets are what a company owns which have a monetary value. They are resources in the control of an entity either as a result of past events and from which future economic benefits are presumed to be derived by the entity.
Assets are reported in the balance sheet. They are classified into two types:
a. Current Assets: These are short term assets and these category of assets are not depreciated. When they are used, they are charged directly to the income statement. A distinct feature of current asset is that they have a general useful life of 12months which is one year. This because of the assumption that within this 12months, an entity would have converted the current asset to cash. If a company decides to convert a part or portion of asset into cash within 12months, that portion converted will be recorded as current asset while the remaining portion will be recorded as non current asset.
b. Non current assets: Non current assets are a company’s long term investments that the duration is over a year. Non current assets cannot be converted to cash easily. They are required for the long term needs of a business or entity. Example of non current asset is land.
Liability is a debt. A payable is always a liability. This is a financial obligation or what the company owes.
Some examples of Liabilities in Financial Statements are: Bank Loan, Overdraft, Interest payable, Tax payable, Account payable, Note payable.
Liabilities are divided into two types: Current liabilities and Non-current Liabilities. Current Liabilities refer to the kind of liabilities expected to settle within 12 months after the reporting date.
Non-current liabilities refer to liabilities that are expected to settle in more than 12 months. For example, a long-term loan from a bank that term of payments is more than 12 is classed as a non-current liability.
c. Equity: This is the remaining value of an owners interest in a company, after all liabilities have been deducted.
The cost of operating a business is called expense. Expense decrease stockholders equity. This is the opposite effect of revenue. A business needs a separate account for each type of expense.
e. Income or Revenue. This is a Company’s sales and total earnings or profit.
These are the basic elements that make up a financial statement and each play its vital role. The omission of any one does not complete a financial statement.
The understanding of each element aids in getting a grip of what it takes to prepare a balanced and complete financial statement.