Elements of Financial Statements (SFAC No. 6)
The second part of the conceptual framework of accounting is ten important elements of financial statements:
1) Assets: The economic resources of a business that are used to earn profit are called assets. If it means that it will be available in the future, it is also called assets. According to FASB, “Assets are probable future economic benefits”. Therefore, if a transaction or event results in the acquisition of rights over something or the ability to acquire financial benefits in the future, it is called asset.
a) Plant Assets: Which have benefits for a long time.
b) Current Assets: whose benefits are short term.
c) Intangible Assets: Intangible Assets: Assets that cannot be seen or touched
d) Fictitious Assets: Are not real assets but are shown as assets in the balance sheet.
2) Liabilities: A financial obligation to be settled in the future is called a liability. According to FASB the liability is “Possible Future sacrifices of economic benefits”.
3) Equity: The owner’s right over the organization is called owner’s equity. Alternatively, subtracting current liabilities and assets from total assets gives owner’s equity.
4) Investment by Owners: The increase in ownership is called equity investment which is considered as additional capital. It is an internal liability.
5) Distributions of Owners: Decrease of owner’s equity is called distribution to the owner. For example; drawings.
6) Revenues: Simply, the cash or material inflows that result from the day-to-day operations of a business are called revenue. Which is shown in the income statement.
7) Comprehensive Income: If the investment by the owner is an increase in ownership, it is called gross income. If the owner’s equity is increased without the owner’s investment, it is called gross income.
8) Gains: An increase in ownership through profits arising from sources other than revenue or equity investments or from unexpected events is called gain.
9) Expenses: An expense is a payment for a product or service in order to earn income. Expenditure does not refer to capital expenditure, but to revenue expenditure.
10) Losses: Loss of ownership of the business due to transactions other than expenses or owner’s drawings is called loss. This is shown in the income statement.
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