SUBJECT: Explanation of the elements of and financial statements
This memo’s objective is to explain the financial statements involved in a typical annual report as well as discussing the elements of the particular statements. Financial statements are often described as the language of business. These statements tell the condition and performance of a business historically, currently and prospectively. They are the tongues of businesses that communicate with their users and readers. Financial statements are the formal product or main output of a business’ financial accounting process. These are the means by which the information accumulated and processed in financial accounting is periodically communicated to the users.
The main financial statements that are found in a report include; Balance sheet, Income statement, Statement of retained earnings, and Statement of cash flows. The main statements of interest in accordance to this memo are the balance sheet and the income statement. The balance sheet reports on a company’s assets, its liabilities, and ownership equity at a given time. It is also known as the statement of financial position. The income statement, also known as Profit and loss statement, reports on a company’s income, its expenses, and profit or loss incurred.
As aforementioned, the financial position of a venture is primarily provided in a balance sheet. The balance sheet contains three elements of financial position explicitly assets, liabilities, and equity (Edmonds et. Al, 2009). These elements compute the financial position of a company. Assets are described as resources guarded by the company owing to past or events from which future economic advantages are anticipated to flow to the company. On the other hand, Liabilities are the current debts of the company arising from past transactions or events the resolution of which is anticipated to result in an outflow from the company of resources exemplifying economic gains. Equity is the company’s assets residual interest after subtracting all of its liabilities (Edmonds ET. Al, 2009).
On the other hand, the income statement relates to the elements related to the measurement of performance, which are income and expenses. Income is the increase in economic benefit during the accounting period in the form of inflow or increase in asset or decrease in liability that results in increase in equity, other than contribution or investment by owners. Expense is the decrease in economic benefit during the accounting period in the form of an outflow or decrease in asset or increase in liability that results in decrease in equity, other than distribution or dividend paid to owners.
Edmonds, T. P., Olds, P. R., McNair, F. M, and Bor-Yi Tsay, (2009) Survey of Accounting. McGraw Hill Higher Education; second revised edition