ELEMENTS OF FINANCIAL STATEMENT:

                                In this article, we will discuss the some key basic elements of Financial Statement and its accounting treatment. Some of the key basic elements are

                                                i) Income / Revenue

                                                ii) Expenses

                                               iii) Assets

                                               iv) Liabilities

                                               v) Equity / Capital

INCOME:

                           The context of income may differ on the basis of Economic, Financial, Taxation and Accounting. In the point of Accounting, Income means amount or cash received for the exchange of goods or service. Further it can be divided into direct income and Indirect Income. 

              Direct Income:

                                 Direct income means all the income earned from the core business activity like sales income and service income. 

              Indirect Income:

                         Indirect income means, income comes from Non-core business activity like Interest from Banks. 

                                                    It will recorded on income statement and increases capital or equity. The journal entry for direct income is 

                     Cash / Accounts Receivable A/c    Dr.  xxx

                             To Sales Revenue  A/c                           xxx

EXPENSES:

                            Expenses can be simply described as the cost incurred by an Individual or Organization in the process of making sales revenue. Expenses can be divided into following three categories:

               Fixed Expenses:

                             Fixed expenses are related to manufacturing of goods and that remains constant irrespective of production. For example, Factory rent and Factory worker's monthly salary.

               Variable Expenses:

                          Variable expenses are related to manufacturing of goods and that have connection with the production and/or sales.. For example, Factory EB bill, Cost of raw materials, payroll for hourly employees and commission on sales.

                 Administrative Expenses:

                         Administrative expenses are related to overall operation of business. For example, Office rent, Salary of office staff, Insurance and Bank interest.

                                          All the expenses are recorded on Income statement and it reduces the capital or equity. The journal entry for booking expenses is

                                 Respective Expenses A/c      Dr.    xxx

                                       To Cash / Bank A/c                         xxx

ASSETS:

                         Asset means anything that a business or an Individual owns or control which has any current or future economic value. Assets can be classified as

                   Fixed Assets:  

                                           It comprises the following categories.

                                 A. Tangible Assets:

                                               It includes the assets like Building, Plant and machinery, Furniture and fittings and Office equipment. 

                                 B. Intangible Assets:

                                              It includes Patents, Trademark, Copyrights, Logo and Goodwill.

                                C. Investments:

                                                It included investments made in Equity, Bonds, Mutual Fund or in any type of Deposits.

                      Current Assets:

                                                  Current assets means assets which has more liquidity like Cash, Bank balance, Accounts Receivables and Inventory. 

                                   All types of assets are recorded on the Balance sheet and journal entry for purchasing a asset is

                                     Assets A/c         Dr.   xxx

                                          To Cash A/c                   xxx

LIABILITIES:

                                          Liabilities are financial obligations that a business owes to other parties like people, business and Government. Liabilities can be classified as 

                          Long term Liabilities:

                                                                 The liabilities which owes for more than a year is referred to Long term liabilities. For example, Bank loans.

                          Short term Liabilities:

                                                                  The liabilities which owes a period of less than a year called short term liabilities. For example, Accounts Payable.

                                 All liabilities are recorded on the balance sheet and journal entry for taking up a bank loan is

                                Bank  A/c              Dr.  xxx

                                    To Loan A/c                       xxx

EQUITY / CAPITAL: 

                                              In proprietorship or partnership business, it referred as Capital and in company it referred as Equity. It is the value of owner's interest in the business after subtracting liabilities from assets. It is also the amount which the owner or shareholders will receive, if the business liquidated its assets and all its liabilities paid off. It recorded on the balance sheet and journal entry for receiving capital is

                                  Bank A/c                                         Dr.  xxx

                                       To Owner / Shareholders  A/c                      xxx

CONCLUSION:

                                             Every transaction in accounting affects at least two accounts, maintain the fundamental accounting equation

                             ASSETS = LIABILITIES + EQUITY

                                       

                                             Every debit has a corresponding credit, ensuring that the accounting equation stays always balanced. Understanding these basic components and their treatment in accounting helps in grasping the bigger picture of Financial Statement and the overall health of a business.