Elements and components of a complete set of financial statements

January 10, 2009 by  
Filed under Accounting

statementsFinancial statements are often described as the language of business. These statements tell the condition and performance of a business historically, currently and prospectively. They are the tongues of businesses that communicate with their users and readers.

Financial statements are the formal end product or main output of a business’ financial accounting process. These are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users.

General purpose financial statements are those intended to serve users who do not have the authority to demand financial reports tailored for their own needs. The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity’s:

1. Assets.

2. Liabilities.

3. Equity.

4. Income and expenses, including gains and losses.

5. Other changes in equity.

6. Cash flows.

Assets, liabilities, equity, income and expenses refer to the quantitative information shown in the balance sheet and income statement. The elements directly related to the measurement of financial position are assets, liabilities and equity. This financial statement is called the balance sheet or statement of financial position. The elements related to the measurement of performance are income and expenses. This financial statement is known as the income statement or sometimes called as statement of operation.

Assets are defined as “resources controlled by the entity as a result of past or events from which future economic benefits are expected to flow to the entity”.

Liabilities are “present obligations of the entity arising from past transactions or events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits”.

Equity is the “residual interest in the assets of the entity after deducting all of its liabilities”.

Income is “increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that results in increase in equity, other than contribution or investment by owners”.

Expense is “decrease in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that results in decrease in equity, other than distribution or dividend paid to owners.

A complete set of financial statements should include:

1. A statement of financial position at the end of the period (also referred to as balance sheet),

2. A statement of comprehensive income for the period (also called as profit and loss statement,

3. A statement of changes in equity for the period

statement of cash flows for the period, and

4. Notes, comprising a summary of accounting policies and other explanatory notes.

Balances sheet is a formal statement showing the financial position of an entity as of a particular date. The balance sheet presents the three elements of financial position namely assets, liabilities and equity.

Income statement is a formal statement showing the performance of the entity for a given period of time. The performance of the entity is primarily measured in terms of the level of income earned by the entity through the effective and efficient utilization of its purpose. This income performance is known as the results of operations of the entity.

Statement of changes in equity explains the changes in an entity’s equity over the reporting period. This statement shows the profit or loss for the period, item of income and expense for the period that is recognized directly in equity, showing, the effects of changes in accounting policies and corrections of errors recognized, capital transactions with owners and others that are required by accounting standards generally accepted in a certain country.

A cash flow statement reports on a company’s cash flow activities, particularly its operating, investing and financing activities.

The notes to financial statements are integral part of the financial statements. They present information about the basis of preparation of the financial statements and the specific accounting policies used; disclose any information required by financial reporting standards that is not presented on the face of the balance sheet, income statement, statement of changes in equity, or cash flow statement; and provide additional information that is not presented on the face of the balance sheet, income statement, statement of changes in equity, or cash flow statement that is deemed relevant to an understanding of any of them.

Source: International Accounting Standards Board (IASB)

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