BA Lesson #6 - Elements of Financial Statements

Hey buddy! You’re on our sixth lesson and today, we will discuss the elements of financial statements. Knowing the elements of financial statements is very vital for you to understand the concept of debits and credits, which is the life of accounting. So let’s get started!

Note that these are just the basic elements of financial statements and we will discuss the remaining on our Intermediate Accounting Lessons.

ASSETS
Assets are economic resources controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the enterprise

Cash

Cash includes not only the bills but also the checks as well.

Prepaid Expense

A prepaid expense is an expense that is paid in advance. Since it is not yet incurred, it is considered as an asset. Common prepaid expenses are prepaid insurance and prepaid rent.

Accounts Receivable

These are your claims against your customers for unpaid bills.

Notes Receivable

These are written promissory notes and are your claims against your customers for unpaid bills. Notes receivables arise as well as the mere transfer of accounts receivable. For example, today is the due date of an account receivable but the customer cannot pay today. As a result, he asked for an extension. This transaction transfers the account receivable into the Notes Receivable account.

Machine, Equipment, Furniture and Fixture, Truck

LIABILITIES

Liabilities are present obligations of an enterprise arising from past transactions, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefit.

Accounts Payable

These are the claims of your creditors against you.

Notes Payable

These are your written promissory notes for your creditors and they usually bear interest.

Unearned Revenue

These are customers’ claim against you as they pay in advance for your future services or products.

CAPITAL OR EQUITY

This is the residual interest of an entity after deducting its liabilities. It is also called as net assets.

Owner’s Equity

It is the claim of an owner in the firm. This account increases as the owner invests cash or properties in the firm.

Drawing Account

It represents the amount withdrawn by the owner for his personal use.

ELEMENTS OF FINANCIAL PERFORMANCE

Income

It is the increase in economic benefits during an accounting period through the enhancements of assets which results in increase in Capital. It may also be resulted from the decreases in liabilities which results in increase in Capital as well.

Expense

It is the decrease in economic benefit during an accounting period in the form of outflows or incurrence of liability that result in decrease in equity. In fact, expense also arises from depletion of assets; however this shall be discussed in our Intermediate Accounting lessons.

LAST WORD

That ends our topic. It is important not just to familiarize yourself from these elements but you shall have memorized them all by heart. In journalizing entries, that is applying the rules of debit and credit, you shall know which elements of financial statements are affected by the transaction. Test yourself if you already know these with our free test materials!

PHOTO REFERENCES

http://www.vandelaydesign.com/accounting-tips/

http://ezylearn.com.au/wordpress/2012/07/ato-says-write-off-6499-of-capital-purchases-in-the-2013-financial-year/

http://www.loscostos.info/financial-accounting/liabilities.html