What are the Elements of Financial Statements?
A financial statement is not just designed for the business or entrepreneur. Shareholders, employees, management, bankers, suppliers, and other interested stakeholders will peep into the statements or demand the document on a regular basis in order to make crucial decisions. The statements will also be crucial for accurate tax returns preparation and other statutory filings. Several elements must be captured in the statement so that it can serve the intended purpose.
Here are the 5 basic elements of any financial statements
These are resources owned and controlled by the business for which present or future benefits may flow to the business. When balancing the accounting equation, asset value will be the difference between equity and liabilities. Examples of assets include computers, land, cash, inventories, goodwill, prepaid expenses, and property, among others.
Liabilities are obligations that the business must meet. They cause resources to flow out of the business or devalue your assets. Liabilities may be current, such that you have to settle them in 12 months or non-current- to be settled after 12 months. Examples of liabilities include bank loans, tax payables, overdrafts, borrowing from parent companies, and salaries payable, among others.
Revenues are defined as an increase in the inflow of cash, enhancement in value of assets, or reduction in liability. All these actions lead to an improved equity position. Some of the revenues to be entered in your statement include sales, receipt of dividends, interests from bank deposits, and provision of services, among other activities.
Expenses refer to a reduction in economic benefit or asset value that affects your equity position. It has an outflow effect and is timed. The entry has to be made accurately so that you can calculate the return-on-investment or break-even-point for a product or business. Some of the expense items include salaries, depreciation, tax, marketing cost, internet, and allowances, among others.
It is regarded as what a business owes its owners. It is calculated as the value of business once its assets have been used to clear liabilities. Simply put, it is the difference between liabilities and assets.
A financial statement will depend on business needs and the type of business you are running. Professional financial services providers will help you to capture all the elements that define your business. The other elements you will find in a statement include losses, gains, distribution to owners, investments by owners, and such other elements. Each business should have customized statements that reflect individual needs.