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10 Elements of Financial Statements

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By Mark Holtzman

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Elements of financial statements are the very building blocks from which accounting
financial statements are prepared. Since accounting is the language of business,
understanding the elements of financial statements will help you grasp the meaning of the
financial statements themselves and some of the most important terms used in business.
FASB defines the elements of the financial statements in Concepts Statement No. 6. All of
the below definitions are quoted from Statement No. 6. Do's and Don'ts for Writing an
Memo

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1. Assets
Assets are probable economic benefits obtained or controlled by a particular entity as a
result of past transactions of events, according to Concepts Statement 6. In English, assets
are things that a company owns, such as cash, accounts receivable, inventory, equipment,
and goodwill. Some assets are tangible (such as motor vehicles) while others are intangible
(such as trademarks). Some assets are current, meaning that they will probably be realized
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within a short period of time, while others are noncurrent, meaning that they will most likely
remain on the balance sheet for a longer period of time.
2. Liabilities
Liabilities are probable future sacrifices of economic benefits arising from present
obligations of a particular entity to transfer assets or provide services to other entities in the
future as a result of past transactions or events, according to Concepts 6. Put another way,
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liabilities are bills that you owe suppliers or the bank. Some typical liabilities are accounts Could Deduct on Your Taxes
payable, notes payable, and bonds payable. Some liabilities are current, meaning that they
are due fairly soon. Others are noncurrent, meaning that they're not due for a long time.
Some liabilities are contingent, such that it is difficult for the company to determine exactly
how much money it will have to pay in the future. Two common contingent liabilities are
legal liabilities for pending lawsuits and liabilities for product warranties.

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3. Equity
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Equity is the residual interest in the assets of an entity that remains after deducting its
liabilities, according to Concepts 6. In other words, equity is what you get when you subtract
liabilities from assets. In a business, equity is the ownership interest. For a corporation,
equity is stockholders' equity, made up of common stock, retained earnings, and sometimes
preferred stock. For a partnership, equity is made up of partners' capital. For a sole
proprietorship, a business owned by one person, equity is comprised of owners' capital.

4. Investments by Owners
Investments by owners are increases in equity of a particular business enterprise resulting
from transfers to it from other entities of something valuable to obtain or increase
ownership interests (or equity) in it. Like all definitions in this article, this definition comes
from Concepts 6. When investors or owners put money into a business, they have made
investments by owners. In a corporation, investments by owners are titled Contributed
Capital, and usually consist of Common Stock and Additional Paid-In Capital.

5. Distributions to Owners
Distributions to owners are decreases in equity of a particular business enterprise resulting
from transferring assets, rendering services, or incurring liabilities by the enterprise to
owners. Distributions to owners decrease ownership interest (or equity) in an enterprise,
according to Concepts Statement No. 6. In a corporation, distributions to owners are called
Dividends. In a partnership or sole proprietorship, these distributions are called Drawings.

6. Comprehensive Income
Comprehensive income is the change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources. It includes
all changes in equity during a period except those resulting from investments by owners
and distributions to owners, according to Concepts 6. The most significant component of
comprehensive income is Net Income, computed as revenues plus gains less expenses less
losses.

7. Revenues
Revenues are inflows or other enhancements of assets of an entity or settlement of its
liabilities (or a combination of both) during a period from delivering or producing goods,
rendering services, or other activities that constitute the entity's ongoing major or central
operations, according to Concepts 6. Revenues are pretty much synonymous with sales.
Companies usually report something called Net Revenues, equal to total Revenues less any
returns and exchanges made by customers.

Don't confuse revenues with cash inflows. You may get paid for a sale on a different date
than the actual sale took place.

8. Expenses
Expenses are outflows or other using up of assets or incurrences of liabilities (or a
combination of both) during a period from delivering or producing goods, rendering
services, or carrying out other activities that constitute the entity's ongoing major or central
operations, according to Concepts 6. The largest expense for most companies is something
called Cost of Goods Sold. This is the cost of the inventory items that a company sold during
the period. Other expenses including selling expenses (such as sales commissions), interest
expense, and income tax expenses.

Expenses provide a benefit to companies. After all, the only reason why managers would
decide to spend money on an expense is if they expected a larger increase in revenues to
result from it.

9. Gains
Gains are increases in equity (net assets) from peripheral or incidental transactions of an
entity and from all other transactions and other events and circumstances affecting the
entity during a period except those that result from revenues or investments by owners,
according to Concepts 6. To compute a gain, take the difference between the money you
receive for an asset and its original book value. Companies record gains and losses towards
the bottom of the income statement.

10. Losses

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Losses are decreases in equity (net assets) from peripheral or incidental transactions of an
entity and from all othe transactions and other events and circumstances affecting the
entity during a period except those that result from expenses or distributions to owners.
Losses are computed the same way as gains, except that they are negative. Don't confuse
Losses with a Net Loss, which is negative Net Income.

The elements of financial statements form building blocks for the financial statements. The
Balance Sheet presents Assets, Liabilities and Equity. The Income Statement presents
Revenues, Expenses, Gains and Losses. The Statement of Stockholders' Equity presents
changes in Equity, Investments by Owners, and Distributions to Owners. The Statement of
Comprehensive Income presents Comprehensive Income.

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Mark HoltzmanAccounting Expert

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Dr. Mark P. Holtzman is Associate Professor and Chair of the Department of

Accounting & Taxation at Seton Hall University. He holds a PhD from The
University of Texas at Austin and a bachelor's degree from Hofstra University,
and has worked in the Audit Department of the New York Office... read more
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