In accounting, elements of financial statements are the individual sets of information that make up the financial statement. It helps in the presentation of the information that will be included in that particular financial statement.
Elements of a balance sheet are assets, liabilities, and equity. Elements of an income statement are revenue and expenses. And elements of a cash flow statement are operating activities, investing activities and financing activities. Note that while both income statements and cash flow statements have three elements, only the balance sheet has assets, liabilities, and equity.
5 Elements of Financial Statements
There are five elements of a financial statement: Assets, Liabilities, Equity, Income, and Expenses. Each of these categories has its own unique set of information that is important to track for a business.
Assets
Assets are things that a company owns and have value. Assets are typically recorded on the balance sheet at their original cost (also called historical cost) less accumulated depreciation, which is an expense that reflects the wear and tears on assets over time. Assets include fixed assets and current assets.
Typically, businesses like to keep track of their assets in order to measure how much they are worth or to serve as collateral for borrowing money or other financing activities. Assets also help investors make decisions on whether the company is doing well financially since they can see what assets are available to be used for future growth.
Liability
Liabilities are obligations of the business that may need to be paid back over a period of time. These would include both short-term (current) liabilities such as accounts payable and long-term liabilities such as mortgages.
Typically, businesses like to keep track of their liabilities in order to measure the total amount that they owe or are obligated to payout. Liabilities also help investors make decisions on whether the company is doing well financially. Since they can see how much debt the business has taken on and if it may be too much to handle.
Equity
Equities are claims by owners of a business on its assets after all debts have been paid off. These would include things such as common stock, preferred stock, treasury stock (stock repurchased by a company), and accumulated other comprehensive income (AOCI).
Typically, businesses like to keep track of their equities in order to measure ownership interest or how many shares of a company an individual has.
Income
Income is money that the company makes from its regular business operations before accounting for expenses such as taxes, interest payments, and other financing activities. Income does not include income from other sources such as investments because there may be no cash inflow to offset any outflow that may occur when these assets are sold (when funds are pulled out). As a result, it’s helpful to keep track of what an organisation earned in order to help make better investment decisions in the future.
Expenses
Expenses are money that the company spent on its regular business operations before accounting for income. Expenses are reduced from total income to derive the net profit or loss of the business.
Typically, businesses like to keep track of their expenses in order to measure how much it costs them to generate revenue or to measure how profitable they are. Expenses also help investors make decisions on whether the company is doing well financially since they can see if the organisation is spending more than what it makes and if so, whether this spending will lead to future problems.
Financial Statement in Accounting
Accounting is the process of measuring and monitoring a business’s financial position to make it easier for investors, managers, and others to understand how well it’s doing financially. Since maintaining financial statements in accounting requires many different steps, the majority of them are done by accountants who have undergone extensive training so they can properly document all necessary information.
The first step in accounting is the bookkeeping process which involves recording every transaction that occurs regarding this specific organisation. From there, accountants will choose how they want to measure these transactions depending on their relative size or what impact these transactions have on the company as a whole. This means that one transaction may be measured differently than another based on its size which makes sense since not all items are equal.
Measurement of Financial Statement
The measurement of a company’s financial statement is incredibly important in order to get an accurate portrayal of its current state. Financial statement measurement helps ensure that all items are accounted for and that no important details are missed.
There are five main elements of financial statements that are typically measured: assets, liabilities, equity, income, and expenses. Each of these measurements is important in order to get a full understanding of the company’s financial situation.
- For example, measuring assets can help investors see how much money the company has available to invest in the future or use towards expansion
- Measuring liabilities can help investors see how much debt the company has taken on and if it may be too much for it to handle
- And measuring income can help investors see how much the company has made from its normal operations and whether or not it can cover its expenses
In most cases, financial statement measurements are done at a point in time and do not change over an extended period of time. This is because accounting involves measuring different things at different points in time so there isn’t one snapshot that can stand alone to measure everything accurately. As a result, most companies use generally accepted accounting principles (GAAP) to maintain consistency when measuring their financial statements.
Conclusion
As you can see, all elements of the financial statement are important for different reasons and have their own unique purpose that allows others to predict what an organisation may do in certain situations based on how it has functioned previously.
As the famous statistician and mathematician George Box once said, “All models are wrong, but some are useful. All financial statements are imperfect representations of what a company may be worth at a given point in time, but these financial statements can still be used to generate useful information that helps us determine how a company is doing financially or if changes need to be made.
