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6/24/22

what are the elements of financial statements

Financial statement

5 Elements of financial statements:

The financial effects of transactions and  events are grouped into broad classes in the framework. These classes comprises the elements of financial statements.  The framework identifies five elements of financial statements, namely: 
  1. Asset
  2. Liabilities
  3. Equity
  4. Income
  5. Expenses.

The first three element of financial statements are shown in the statement of financial position and are used in measuring the financial position of an entity, while the last two income and expenses are used to measure the performance of an entity and are shown in the income statement, other wise known as the income and loss account or income and expenditures account.
The famework defines the elements as follows.

1. Assets

An asset is a resource controlled by an entity as a result of past events and for which future economic benefits are expected to flow to the entity.

Note the following key terms used in the above definition:
  • Resource controlled by an entity (An entity has control over resources if it can see direct the use of the resources for it benefits.
  • Past events (The event should have occurred before the the ownership of the asset.
  • Future economic benefits (the resources controlled by the entity should have the potential to contribute directly or indirectly to the receipt of cash and cash equivalent by the entity.

2. Liability

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources emboardying economic benefits. Based on this definition, a liability is not merely an obligation; it is a present obligation. A present obligation is different from a future commitment. Other key terms include past events and outflow of an economic benefits, for example, transfer of cash or other assets by the enterprise.

3. Equity

Equity is the residual interest in the asset of the entity after deducting all it's liabilities.

4. Income terms 

These have been defined by framework as increase in economic benefit during the accounting period, in the form of inflow or enhancements of assets or decrease of liabilities that result in increase in equalit, other than those relating to contributions from equity participation.

5. Expenses

These are decrease in economic benefits during an accounting period in the form of assets or incurring of liabilities that result in decrease in equity, other than those relating to distributions to equity participation.

Recognition of the elements of financial statements:

Recognition criteria;

According to the framework recognition is the process of incorporating in the statement of financial position or income statement an item that meets the definition of an element and satisfies the following criteria for recognition;
  • It is probably that any future economic benefits associated with the item will flow to or from the entity.
  • The item has a cost or value that can be measured reliably.
It is necessary to note that the first recognition criteria is that the items should meet the definition of an element of financial statements.

Recognition stages;

Under the framework, the recognition of assets and liabilities fall under three stages. Which are as follows;
  • Initial recognition (This occur when an item first meets the definition of an asset or liability, for instance the acquisition of a building.
  • Subsequent re-measurement ( This involves changing the value at which an asset or a liability was initially recognize, that is if a building is partly destroyed or when assets are revalued by proffesional revaluers, the carrying values will be restated.
  • De-recogniton ( This occur when an item no longer meets the definition of an asset or liabilities, for instance if a building is sold or completely destroyed.

Measurements of the elements of financial statements:

Elements of financial statements



The framework defines "measurements" as the process of determining the monetary amount at which the elements of financial statements are to be recognized and carried in the statement of financial position and income statement. Its identifies four bases of measurements, namely: 
  • Historical cost
  • Current cost
  • Realisable value
  • Present value.

1. Historical cost

Assets are recorded at the amounts of cash and cash equivalents paid of the fair value of the consideration given in exchange for them at the time of aquisition. Liabilities are recorded at the amounts of proceeds received in exchange for the obligations.

2. Current cost

Assets are carried at the amounts of cash or cash equivalents required to aquire the same or identical assets currently. Liabilities, on the other hand are carried at the undiscounted amount currently required to settle the obligation.

3.  Realisable (settlement) value

According to the framework a realisable value is the amount of cash or cash equipment that will currently be obtained by selling an assets in an orderky disposal, while "settlement value" refers to the undiscounted amount of cash and cash equivalent expected to be paid to satisfy the liabilities in the normal ccours of business.

4. Present value

This refer to a current estimate of the present discounted value of the future net cash flow in the normal course of business. The framework does not require the application of any particular basis. In practice, historical cost is the most common basis;the others bases are applied as appropriate.

The elements of financial statements is an important framework in the accounting and reporting Concept.

There are four primary financial statements: the balance sheet, the income statement, the cash flow statement, and the statement of shareholders' equity. Each one provides information about a different aspect of a company's financial health.

The balance sheet lists a company's assets, liabilities, and shareholders' equity at a specific point in time. It can be used to calculate key ratios like the debt-to-equity ratio, which is a measure of a company's financial leverage.

The income statement shows a company's revenue, expenses, and net income for a specific period of time. It can be used to assess profitability and trends over time.

The cash flow statement shows a company's cash inflows and outflows for a specific period of time. It can be used to assess a company's short-term liquidity and its ability to generate cash flow.

The statement of shareholders' equity shows a company's beginning equity balance, changes in equity for the period, and ending equity balance.

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