ELEMENTS OF THE FINANCIAL STATEMENTS

Recognition of Elements of Financial Statements

➔ Recognition is the process of incorporating in the balance sheet or income statement an item that meets the
definition of an element of financial statements. It is also called recording
➔ Recognition involves the depiction of an item in words (account titles and description) and by monetary units. The
monetary value is usually historical cost, which is the amount of cash or cash equivalents paid or to be paid, or
the fair value of the consideration given to acquire at the time of their attainment
➔ On the other hand, derecognition is the removal of an element in the financial statements when it ceases to be an
element (Banggawan & Asuncion, 2017 & Frias & PEfianco, 2016)
➔ When an element is recognized, it gives rise to the recognition of another element. This is called the duality
principle. COntemporary accounting makes use of a double entry system. Under this system, changes on two
elements are recorded every time a transaction is recorded (Banggawan & Asuncion, 2017)

Elements of Financial Position

➔ The elements of financial position are classified into
◆ Assets
◆ Liabilities
◆ Equity
➔ These elements are presented in the balance sheet or statement of financial position. These are important in
assessing business stability and financial condition
A. Assets
➔ Assets are resources controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity (Conceptual Framework for Financial
Reporting, 2018)
➔ Assets are classified into current and noncurrent assets
a. Current Assets:
i. It is expected to be realized in, or is intended for sale or consumption in the entity’s
normal operating cycle
ii. It is held primarily for the purpose of being traded
iii. It is expected to be realized within 12 months after the balance sheet date
iv. It is cash or a cash equivalent (as defined in IAS 7 Cash Flow Statements), unless it is
restricted from being changed, or used to settle a liability for at least 12 months after the
balance sheet date
b. Current Assets (2)
i. Cash on Hand
ii. Petty Cash Fund
iii. Cash in Bank
iv. Accounts Receivable
v. Allowance for Doubtful Accounts
vi. Notes Receivable
vii. Inventories
viii. Unused Supplies
ix. Prepayments like Prepaid Rent, and Prepaid Insurance
c. Noncurrent Assets
i. Land
ii. Buildings
iii. Accumulated Depreciation (Contra Asset Account)
iv. Equipment
v. Long-term Investments
vi. Intangible Assets
 ➔ Duality Effect on Assets (Banggawan & Asuncion, 2017)
An increase in asset of the business may This is recorded in accounting as
either be:

➔ An income earned ➔ Increase in asset and increase in

income

➔ A liability borrowed ➔ Increase in asset and increase in

liability

➔ A capital contributed by the business ➔ Increase in asset and increase in

owner capital

A decrease in asset of the business may

either be:

➔ A payment of expense ➔ Decrease in asset and decrease in

expense

➔ A payment of liability ➔ Decrease in asset and decrease in

liability

➔ A return of capital to the business ➔ Decrease in asset and decrease in

owner capital

B. Liabilities
➔ Liabilities are present obligations of the entity arising from past events, the settlement of which
are expected to result in an outflow from the entity of resources embodying economic benefits
(Conceptual Framework for Financial Reporting, 2018)
➔ Just like the assets, liabilities are also classified into current and noncurrent liabilities
a. Current Liabilities
i. It is expected to be settled in the entity’s normal operating cycle
ii. It is due to be settled within 12 months after the balance sheet dates
iii. The entity does not have an unconditional right to defer settlement of the liability for at
least 12 months after the balance sheet date
b. Current Liabilities (2)
i. Accounts Payable
ii. Notes Payable
iii. Unearned Income/Deferred Income
iv. Accrued Expenses
c. Noncurrent Liabilities
i. Mortgage Payable
ii. Long-term Debts
➔ Duality Effect on Liabilities (Banggawan & Asuncion, 2017)

An increase in liability of the business may This is recorded in accounting as

either be:

➔ An expense which is accrued ➔ Increase in liability and increase in

expense

➔ An asset which is borrowed ➔ Increase in liability and increase in

asset

➔ A replacement to another liability ➔ Increase in liability and decrease in

liability
 A decrease in liability of the business ➔ Decrease in liability and decrease in
occurs when it is paid asset

C. Equity
➔ Equity is the residual interest in the assets of the entity after deducting all ints liabilities.
(Conceptual Framework for Financial Reporting, 2018)
a. Owner’s Capital
b. Owner’s Drawing
➔ Duality Effect on Equity (Banggawan & Asuncion, 2017)
An increase in equity of the business may This is recorded in accounting as
either be:

An asset contributed by the owners Increase in equity and increase in asset

A liability converted into equity Increase in equity and decrease in liability

A decrease in equity of the business is a Decrease in equity and decrease in asset

return of capital to the owners

Elements of Financial Performance

➔ The elements of financial performance are classified into:
◆ Income
◆ Expenses
➔ These are the elements that are presented in the income statement. These elements are important in assessing
profitability
A. Income
➔ Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants (Conceptual Framework for Financial
Reporting, 2018)
a. Types of Income:
i. Revenue from the sale of goods or services in the normal course of business
ii. Other Income from secondary sources such as interest or dividends received from
investments
iii. Gains from selling assets of the business other than goods that are normally held for sale
b. Income:
i. Sales
ii. Service Income
iii. Commission Income
iv. Interest Income
➔ Duality Effect on Income (Banggawan & Asuncion, 2017)
◆ The recording of income is usually accompanied by the recording of a/an:
● Increase in asset
● Decrease in liability
B. Expenses
➔ Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other
than those relating to distributions to equity participants (Conceptual Framework for Financial
Reporting, 2018)
a. Nature of Expense
i. Period Expenditures - a payment or an obligation to pay during the period for something
that has no future economic benefits
ii. Depletion of Assets - an expiration of an asset caused by usage or passage of time
iii. Loss - a value lost without consideration received
b. Expenses
i. Cost of Sales/Service
ii. Salaries Expense
iii. Utilities Expense
iv. Rent Expense
v. Supplies Expense
vi. Transportation Expense
vii. Depreciation Expense
viii. Representation Expense
ix. Interest Expense
➔ Duality Effect on Expense (BAnggawan & Asuncion, 2017)
◆ The recording of expense is usually accompanied by the recording of a/an:
● Decrease in asset
● Increase in liability