- The main elements of financial statements
- Assets
- Passives
- Heritage
- Income
- Expenses
- Profits
- Losses
- References
The elements of financial statements, written reports that record the financial situation of a company, are those that allow identifying what are the losses, profits and cash flow at a given time.
They are one of the main components of a company's business registration. In addition, they are the main method of presenting financial information about an entity to third parties.
Financial statements comprise a large amount of data in a simplified, organized and synthesized way, being designed to provide useful information for the owners, potential buyers and creditors of a company.
The main elements of financial statements
The financial statements contain a series of elements that allow to identify the state of the finances of a company.
These elements correspond to specific and internationally standardized data that allow the information to be arranged in an organized manner. This implies different advantages within the business world.
On the one hand, it is extremely useful for presenting a large mass of information in summary form. But more importantly, it allows a common analysis framework that facilitates the comparison between different companies and the generation of statistics by territories and business sectors.
Assets
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Assets refer to the properties or legal rights that companies have over goods that have some monetary value. It is considered that this value may represent future economic benefits.
Assets can be tangible, such as buildings, machinery, and furniture. However, they can also be intangible like patents or trademarks.
Assets are classified as fixed and current. Fixed assets are those that are kept in the company for an extended period of time.
On the other hand, current assets are those that are quickly converted into cash, for example, receivables.
Passives
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Liabilities are the financial representation of the present obligations that a company has caused by past activities. It is considered that the fulfillment of these activities can represent economic benefits.
In all cases, liabilities are an obligation that has a legal basis. This can be a contract or a guarantee.
Liabilities are classified as current and non-current. Current liabilities refer to obligations that must be paid during the current period.
In turn, non-current liabilities are those that must be paid over a longer period, for example long-term loans.
Heritage
Equity refers to the relationship between assets and liabilities of the company. In turn, the concept of net worth refers to the difference between the assets and liabilities of a company.
It is an estimate of the company's balance sheet. However, it does not equal the commercial value of it.
The equity of a company is especially important when it is required to generate a report for external entities. For example, to publicize the general status of it to potential investors.
Income
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Income refers to the economic income that a company receives as a result of the sale of its products or services. These are classified into gross income and net income.
Gross income is the income obtained during a period of time, without taking into account production costs such as salaries, commissions, raw materials, etc.
For its part, net income corresponds to the remaining value when all production costs are subtracted from gross income.
Income is not the same as profits. In those cases where the value of the costs is greater than the value of the tickets, there is no benefit. Therefore, there may be income even in those cases where there are losses.
Expenses
It refers to all the economic outlets that are necessary for the generation of income through the sale of products or services. This includes salaries, utilities, and raw materials necessary to run the business.
The concept of "expenses" is different from the concept of "payments." It is considered that a company incurs an expense at the time of enjoying a specific service.
Instead, payments refer to the specific transaction in which the economic remuneration of that expense is made. This differentiation is important because payments can occur at different times than expenses.
For example, when a new professional is hired, an expense is incurred from the moment he begins to provide his services. However, the payment occurs on the date the employee receives his salary each month.
Profits
Profits are economic benefits that result from business transactions carried out by a company. They correspond to total income minus total expenses.
Usually, the term "profit" also refers to the difference between the selling price of a specific product and its cost of production.
This concept also refers to an increase in the equity of the company as a result of transactions that are not frequent in its economic activity.
For example, the sale of machinery for a value greater than its value registered in equity, would imply a profit for a company that is not engaged in the purchase and sale of machinery.
Losses
The losses of a company refer to a decrease in assets as a result of the company's business transactions.
These can occur within the performance of normal activities, in those cases where production costs are lower than income.
However, they can also occur as a result of different transactions. For example, the sale of machinery for a value lower than that registered in equity would mean a reduction in equity.
It is essential to bear in mind that losses and expenses are concepts that express different realities. Expenses imply a reduction of assets, however they occur before transactions and are oriented to the generation of profits.
Instead, losses are a reduction in assets that occurs after business transactions, therefore they cannot generate any subsequent profit.
References
- Chartered Education. (SF). Elements of Financial Statements Part 1: Assets, Liabilities and Equity. Recovered from: charterededucation.com.
- Henry Harvin Education. (SF). 10 elements of financial statements. Recovered from: henryharvin.com.
- INC. (SF). Financial Statements. Recovered from: inc.com.
- Study.com. (SF). What is revenue? Recovered from: study.com.
- Thomson Gale. (2007). Financial Statements. Recovered from: encyclopedia.com.