Elements of Financial Statements

A financial statement is a formal record of the financial activities and position of a business, built from 5 elements.

Income

Increases in assets, or decreases in liabilities, that increase equity, excluding contributions from equity holders.

• Sales revenue / turnover, service revenue, interest income, dividend income, rental income, commission income.
• Net sales
  Sales revenue after deducting returns, discounts, and allowances.
• Other operating income
  Income from activities related to normal operations but outside core sales.
• Gain on disposal of assets
  Profit from selling an asset above its carrying value.

Expense

Decreases in assets, or increases in liabilities, that decrease equity, excluding distributions to equity holders.

Administrative Expenses

Costs of running and managing the business, not tied to producing or selling goods.

• Salaries, office rent, utilities, insurance, stationery and printing, professional fees, audit fees, repairs and maintenance, travel, training, depreciation, amortization.
• Bad debt expense
  Receivables already confirmed uncollectible, written off during the period.
• Provision for doubtful debts
  Estimated future losses on receivables not yet confirmed uncollectible.

Distribution Expenses

Costs of selling and delivering goods to customers.

Advertising, sales commission, delivery expense / carriage outwards, marketing, packaging.

Finance Expenses

Costs of financing the business, arising from borrowing and holding funds.

Interest expense, bank charges, interest income, foreign exchange gain or loss.

Assets

A present economic resource controlled by the entity as a result of past events, where the resource is a right with potential to produce economic benefits.

Non-current Assets

Assets expected to provide economic benefits for more than 1 accounting period, not intended for sale or consumption within the normal operating cycle.

• Property, plant and equipment: land, buildings, machinery and equipment, furniture and fixtures, motor vehicles.
• Accumulated depreciation
  Total depreciation charged on an asset since acquisition, reducing its carrying value.
• Intangible assets: patents, copyrights, trademarks.
• Goodwill
  Excess paid when acquiring a business over the fair value of its net assets.
• Long-term investments.
• Deferred tax assets
  Future tax benefits arising from temporary accounting differences.

Current Assets

Assets expected to be realized, sold, or consumed within 1 year or within the entity’s normal operating cycle, whichever is longer.

• Cash and cash equivalents, inventory, short-term investments, accrued income.
• Accounts receivable.
• Allowance for doubtful debts
  Estimate of receivables that may not be collected.
• Prepaid expenses
  Payments made in advance for future services or benefits, e.g. prepaid rent or insurance.

Liabilities

A present obligation of the entity to transfer an economic resource as a result of past events.

Non-current Liabilities

Obligations not due for settlement within 1 year or within the entity’s normal operating cycle.

• Long-term loans, debentures / bonds payable, mortgage payable.
• Lease liabilities
  Future lease payments recognized under accounting standards such as IFRS 16.
• Deferred tax liabilities
  Future tax obligations arising from temporary differences between accounting and tax treatments.
• Provision for employee benefits
  Estimated future obligations such as gratuity or pension.

Current Liabilities

Obligations expected to be settled within 1 year or within the entity’s normal operating cycle.

• Accounts payable, short-term loans, bank overdraft, income tax payable, dividends payable.
• Accrued expenses
  Incurred but unpaid, e.g. salaries or interest payable.
• Current portion of long-term debt
  The amount of long-term borrowings due within the next year.
• Unearned revenue
  Cash received before goods or services are delivered.

Equity

The residual interest in the assets of the entity after deducting all its liabilities.

• Share capital: ordinary share capital, preference share capital.
• Share premium
  Amount received above the face value of shares issued.
• Retained earnings
  Cumulative profits retained rather than distributed as dividends.
• Reserves
  Profits set aside for a specific purpose, e.g. expansion or contingencies.
• Revaluation surplus
  Increase in asset value recognized through revaluation.
• Treasury shares
  Shares repurchased by the company from its own shareholders.