COMPANY LAW Elements of Financial Statements

Elements of Financial Statements

The financial elements of a financial statement are broadly classified into five categories. These are grouped according to the monetary characteristics they possess. Let’s have a brief understanding of all five.

Assets

An asset is a resource (either tangible or intangible) which is in control of the enterprise to derive monetary benefits from the use of it. Some of the points to be remembered are:

  • An asset should not necessarily have a physical existence.
  • An asset need not necessarily be owned. It should only be in control of the enterprise. An asset taken on lease from its owner will not be mentioned in the books of theowner but to whom it is in control of or leased to.
  • In order for an asset to be recognized, there should be sufficient control over it. For example copyrights, patents, trademarks etc.
  • An asset in order to be called an asset should be able to reap future financial benefits. An asset who ceases to have any value in a current accounting period cannot be termed as an asset.
  • An asset’s value or cost should be easily calculable or measurable.

Liabilities

Liability is defined as an obligation of an enterprise that arose as a result of past events. Some of the important points to be remembered in its context are:

  • A liability is recognized with the evidence shown in the balance sheet date.
  • Certain provisions like provision for depreciation, provision for bad and doubtful debts and other provisions are not considered aliability but rather as a reduction in the value of theasset.

Equity

Equity can be defined as the remaining interest of an enterprise over its assets after deduction of liabilities from it. In short, equity is the excess of aggregate assets over aggregate liabilities.

Income

Income can be:

  • any increase in the economic benefit as a result of inflow or encashment of asset
  • Increase in equity with the decrease in liability.

Income also includes the revenues and gains. Revenue is an income which arises during the ordinary course of business whereas,a gain is an income which may or may not arise during the normal course of business.

Expense

The expense is an antonym of income. Following are considered as an expense:

  • Any decrease in the economic benefit as a result of outflow
  • Deterioration of assets

The expense is defined as the charges incurred in the ordinary course of business like wages paid, rent paid etc., whereas losses may or may not incur in the ordinary course of business. For example loss on the sale of fixed assets. Expenses are shown on the debit side of profit and loss A/C.

Disclaimer:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances; Before making any decisions do consult your Professional / tax advisor. For misrepresentation or interpretation of act or rules Author does not take any responsibility. Neither the author nor the firm accepts any liability for the loss or damage of any kind arising out of information in this document or for any action taken in reliance there on. The author is a Chartered Accountant and the Chief Gardener & Founder Director of Rajput Jain & Associates , a leading Tax & Investment Planning Advisory Service Provider. His blog can be found at http://carajput.com/blog/For any query you can write to info@carajput.com. Hope the information will assist you in your Professional endeavors. For query or help, contact:   info@carajput.com or call at 09811322785/4 9555 5555 480)

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