Statement of Financial Accounting Concepts (SFAC) 6, regulated by Generally Accepted Accounting Principles (GAAP), includes 10 financial statements’ elements that concentrate primarily on evaluating the efficiency and determining the financial situation of the company. In its components that conform to the financial statements, it has reflected the accrual accounting scheme. The general criteria for the recognition of elements included in the financial statements are as follows:
iv. Investments by owners
v. Distributions to owners
xi. Comprehensive Income Statement
In the balance sheet, an asset is acknowledged when the future financial advantages are likely to flow to the entity and the asset has a price or value that can be reliably assessed. Economic advantages contribute in the form of money or cash equivalents, directly or indirectly. Although many assets, such as equipment, are in physical form, the physical form is not essential. Patents and intellectual property, for instance, are entity-controlled assets with potential economic advantages. Assets can be classified into:
a. Tangible Assets
Tangible Assets are the assets that have physical existence i.e. the assets that can be touched or seen.
Examples of tangible assets are machinery, building, furniture, etc.
b. Intangible Assets
Intangible assets are assets that do not have any physical existence. the assets that cannot be touched or seen. Examples of the Intangible assets are goodwill, patents, trademarks, etc.
c. Fixed Assets
Fixed assets are assets used for more than one accounting period and their benefit is derived over a longer period of time. The examples of fixed assets are computers, land, machinery, etc.
d. Current assets Current assets are the assets that can readily be converted into cash and are generally absorbed within one accounting period.
The examples of the Current assets are bills receivable; debtors exist to convert them into cash, etc.
A liability is recognized in the balance sheet when the outflow of resources with economic benefits is likely to result from the settlement of a current obligation and the amount of the settlement can be measured reliably. In other words, liability is the amount owed by the business to the proprietor and to the outsiders. For example, accounts payables are present obligations, which will result in an outflow of resources embodying economic benefits. Liabilities are generally categorized into two broad categories:-
a. Current Liabilities
The obligations or payments that are repayable during the current financial year are called Current Liabilities
The examples of current liabilities are Creditors, bills payable.
b. Non-Current Liabilities
The payments which are due for payment over a long period of time and there is no need to discharge it immediately are called Non- Current Liabilities.
The examples of Non-Current liabilities are Debentures, long term loans, etc
iii. EQUITY Equity in the form of stock represents an ownership interest in a company. It’s the difference between the value of assets and the cost of liabilities of something owned, being accurate in the accounting terms. It is primarily a residual amount adjusted for liabilities by the assets.
Equity = Assets – liabilities
iv. INVESTMENT BY OWNERS
It shows an increase in equity resulting from resource transfer in exchange for an ownership interest. It basically describes the contribution of any owner to the company.
The issue of stock ownership by a company in exchange for cash is an investment by owners.
v. DISTRIBUTION TO OWNERS It represents a decrease in equity which results from transfer to owners. It determines the owners’ withdrawal from the ownership interest of the firm.
The examples of distribution to owners A cash dividend paid to its shareholders by a corporation.
Income is acknowledged in the income statement when there is an increase in future financial advantages that can be measured reliably due to a rise in an asset or a reduction in liability. In impact, revenue recognition happens concurrently with the recognition of asset rises or liability reduces. An example of income is when a sale is completed; it results in a net increment in assets (cash). Income includes both gains and revenues, such as from the sale of assets
Revenue is the income from ordinary company operations that a company earns. It is an inflow of assets that leads to an increase of owners ‘ equity.
The example of revenue is the Exchange of goods and services for money consideration.
Gain is an increase in owners ‘ equity from irregular and non-recurring peripheral operations.
The example of Gains is Selling equipment for an amount which is higher than its book value (original cost less depreciation) would lead in a company profit other than selling and buying equipment
Expenses are acknowledged when there has been a decline in future financial advantages linked to a decline in an asset or an increase in a responsibility that can be reliably measured. It can also be referred to as the company enterprise’s gross outflows for revenue generation. An expense is paid to the Profit and Loss Account In effect; costs are recognized at the same time as a rise in liabilities or a decline in assets. An example of expenses is the depreciation of an asset decreases the asset and the expense is recognized. Expenses include both expenses and losses.
x. LOSSES Loss is a decline in owners ‘ equity from irregular and non-recurring peripheral operations.
The Example of Losses is Sale of equipment for an amount lesser than its book value (original cost less depreciation) would result in a loss to a company that is involved in the business of sale and purchase of machinery.
xi. COMPREHENSIVE INCOME
Comprehensive income is a shift in a company’s equity from non-owner source operations. It covers all modifications in a company’s equity other than those arising from owners ‘ investments and distributions to shareholders.
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