ELEMENTS OF FINANCIAL STATEMENTS

<< IASB’S FRAMEWORK

EVENTS AFTER THE BALANCE SHEET DATE >>

Advance Financial Accounting (FIN-611)

LESSON # 26

ELEMENTS OF FINANCIAL STATEMENTS

Financial information of an entity are classified into five main heads, these main heads

are elements of financial statements.

Elements of financial statements

Measurement of financial

position through balance sheet

performance through income statement

Assets

Liabilities

Incomes

Equity

Expenses

Assets:

These are the resources in control of the entity as a result of past events and from

which future economic benefits are expected to flow to the entity.

Points to remember:

1. Resources in control

2. Past event

3. Future inflow

Liabilities:

These are the present obligations of the entity arising from past events, the settlement

of which is expected to result in an outflow from the entity of resources embodying

economic benefits.

Points to remember:

1. Present obligation

2. Past event

3. Future outflow

130

Advance Financial Accounting (FIN-611)

Equity:

Equity represents residual interest in the assets of the entity after deducting all its

liabilities.

Points to remember:

1. Equity contributed

2. Reserves created

Incomes:

Incomes establish increases in economic benefits during the accounting period in the

form of inflows or enhancements of assets or decreases of liabilities that result in

increases in equity other than those relating to contributions from equity participants.

Incomes include:

1. Revenue

a. Sales of goods

b. Sales of services

c. Returns on investments

2. Gains

a. Disposal of assets at a value higher than its carrying amount

b. Discharge of liabilities at a value lesser than its carrying amount

Expenses:

Expenses establish decreases in economic benefits during the accounting period in the

form of outflows or decrease in assets or incurrence of liabilities that result in

decreases in equity, other than those relating to distributions to equity participants.

Expenses include:

1. Revenue Expenses

a. Expenses that arise in the course of ordinary activities of an entity.

2. Losses

a. Disposal of assets at a value lesser than its carrying amount

b. Discharge of liabilities at a value higher than its carrying amount

Measurement of the Elements of Financial Statements

A number of different measurement bases are employed to different degrees and combinations

in financial statements. These include:

131

Advance Financial Accounting (FIN-611)

1. Historical Cost

Assets are recorded at the amount of cash paid to acquire them. Sometimes the terms

cash equivalents or fair value at acquisition will be used instead.

Liabilities are recorded at the proceeds received in exchange for the obligation on the

date of transaction.

2. Current Cost

Assets are carried at their current purchase price.

Liabilities are carried at the undiscounted amount currently required to settle them.

3. Realizable Value

Assets are carried at the amount, which could currently be obtained by an orderly

disposal.

Liabilities are carried at their settlement values, the amount to be paid to satisfy them

in the normal course of business.

4. Present Value

Assets are carried at the present discounted value of the future net cash inflows that

the item is expected to generate in the normal course of business.

The most common measurement basis adopted by the entity in preparing financial

statements is historical cost. This is usually combined with other bases.

132

Table of Contents: