What are the Components of Financial Statements?
The components of Financial Statements are the building blocks that together form the Financial Statements and help understand the business’s financial health. And consists of an Income Statement, Balance Sheet, Cash Flow Statement, and Shareholders’ Equity Statement. Each component serves a purpose and helps understand the business’s financial affairs in a summarized fashion.
Table of contents
Top 4 Components of Financial Statements
The four components are discussed below:
#1 – Balance Sheet
The balance sheet reports the business’s financial position at a particular point in time. It is also known as the Statement of Financial Position or Statement of Financial Condition or Position Statement.
It shows the Assets owned by the business on one side and sources of funds used by the business to hold such assets in the form of Capital contribution and liabilities incurred by the business on the other side. In a nutshell, the Balance Sheet shows how the money has been made available to the company’s business and how the company employs the money.
Balance Sheet Consists of 3 Elements:
These are the resources controlled by the business. They can take the form of Tangible AssetTangible AssetTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation. or Intangible AssetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. and can also be classified based on Current AssetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc. (which are to be converted into cash within a year) and Non-Current AssetsNon-Current AssetsNon-current assets are long-term assets bought to use in the business, and their benefits are likely to accrue for many years. These Assets reveal information about the company's investing activities and can be tangible or intangible. Examples include property, plant, equipment, land & building, bonds and stocks, patents, trademark. (which are not converted into cash within a year).
These are the amounts owed to lenders and other creditors. Liabilities are further classified into Current Liabilities Classified Into Current LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc. such as Bills Payable, Creditors, etc. (which are payable within a year) and Non-Current Liabilities such as Term Loans, Debentures, etc. (which are not payable within a year).
Also known as Capital ContributionCapital ContributionContributed capital is the amount that shareholders have given to the company for buying their stake and is recorded in the books of accounts as the common stock and additional paid-in capital under the equity section of the company’s balance sheet. by the Owner. It shows the residual interest in the Net AssetsNet AssetsThe net asset on the balance sheet is the amount by which your total assets exceed your total liabilities and is calculated by simply adding what you own (assets) and subtract it from whatever you owe (liabilities). It is commonly known as net worth (NW). of an entity that remains after deducting its liabilities. It is also a sign of the promoter’s skin in the game (i.e., business).
For each transaction in the Balance Sheet, the fundamental accounting equationAccounting EquationAccounting Equation is the primary accounting principle stating that a business's total assets are equivalent to the sum of its liabilities & owner’s capital. This is also known as the Balance Sheet Equation & it forms the basis of the double-entry accounting system. holds:
#2 – Income Statement
The Income Statement reportsIncome Statement ReportsThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements. the financial performance of the business over some time and comprises Revenue (which comprises all cash inflows from the manufacturing of goods and rendering of services), Expenses (which comprise all cash outflows incurred in the manufacturing of goods and rendering of services) and also comprise of all gains and losses which are not attributable in the ordinary course of business. Excess of Revenues over Expenses results in Profit and vice versa, resulting in Loss for the business during that period.
Under IFRS, Income Statement also comprises Other Comprehensive IncomeOther Comprehensive IncomeOther comprehensive income refers to income, expenses, revenue, or loss not being realized while preparing the company's financial statements during an accounting period. Thus, it is excluded and shown after the net income., which consists of all changes in Equity except for shareholder transactions and, as such, can be presented together as a single statement. However, as per US GAAPGAAPGAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting. guidelines, Statement of Comprehensive IncomeStatement Of Comprehensive IncomeStatement of Comprehensive Income refers to a financial performance statement prepared monthly, quarterly, or yearly, other than the Income Statement. It records the details of the company's unrealized revenue, income, expenses, or loss when a company prepares the financial statements of the accounting period. forms part of the Statement of Changes in EquityStatement Of Changes In EquityStatement of changes in equity is the adjustment of opening and closing balances of equity during a particular reporting period. It explains the connection between a company’s income statement and balance sheet. It also includes all those transactions not captured in these two financial statements..
#3 – Statement of Changes in Equity
This statement is one of the financial statement components, which reports the amount and sources of changes in Equity Shareholders’ Investment in the business over a while. It summarizes the changes in the capital and reserves attributable to equity holders of the company over theAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance. accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.. Accordingly, all the increases and decreases during the year, when adjusted with the Beginning balance, result in the ending balance.
The statement includes transactions with shareholders and reconciles each equity account’s beginning and ending balance, includingThe capital stock is the total amount of share capital (including equity capital and preference capital) that has been issued by a company. It is a way of raising funds by the company to meet its various business goals. capital stockCapital StockThe capital stock is the total amount of share capital (including equity capital and preference capital) that has been issued by a company. It is a way of raising funds by the company to meet its various business goals., additional paid-in capitalAdditional Paid-in CapitalAdditional paid-in capital or capital surplus is the company's excess amount received over and above the par value of shares from the investors during an IPO. It is the profit a company gets when it issues the stock for the first time in the open market., retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company., and accumulated other comprehensive income. The statement shows how the composition of equity (share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side., other reserves, and Retained Earnings) has changed over the years.
#4 – Cash Flow Statement
This statement shows the changes in the business’s financial position from the perspective of the movement of cash into and from the business. The primary rationale behind preparing a cash flow statement is to supplement the Income Statement and Statement of Financial Position. These statements don’t provide sufficient insight into movements in cash balances.
The cash flow statement bridges that gap and helps various business stakeholders understand the sources of cash and utilization of cash. There are three sections to the cash flow statementCash Flow StatementA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business., namely:
- Cash Flow from Operating ActivitiesCash Flow From Operating ActivitiesCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital. starts from Operating Profit and reconciles operating profit to cash.
- Cash Flow from Investing Cash Flow From Investing Cash flow from investing activities refer to the money acquired or spent on the purchase or disposal of the fixed assets (both tangible and intangible) for the business purpose. For instance, the purchase of land and joint venture investment is cash outflow, while equipment sale is a cash inflow.Activities – comprises all acquisitionAll AcquisitionAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion./purchase of long-term assets and disposal/sale of long-term Assets and other investments that are not included in cash equivalent. It also includes receipts of interest and dividends from investments.
- Cash Flow from FinanceCash Flow From FinanceCash flow from financing activities refers to inflow and the outflow of cash from the financing activities like change in capital from securities like equity or preference shares, issuing debt, debentures or repayment of a debt, payment of dividend or interest on securities. – It accounts for equity capital and borrowings changes. It comprises the payment ofDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. dividends to the shareholdersDividends To The ShareholdersDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. cash flows arising from the repayment of loans, and fresh borrowing and issue of shares.
Each component of the Financial Statements serves a unique and useful purpose and helps various stakeholders understand the business’s financial health in a more simplified manner and make better decisions, either an investor or a lender, and so on.
- The balance sheet statement has its utility lies in showing the position of the business on a particular date.
- On the other hand, the income statement shows the performance of the business during the year and provides a more granular view, thereby complementing the Balance Sheet.
- The statement of changes in Equity shows how equity capital changed during the accounting period and helps stakeholders understand the Owner’s perspective.
- A cash flow statement provides information about the company’s cash receipts and cash payments during an accounting period, which provides meaningful information to analyze the business’s liquidity, solvency, and financial flexibility.
This has been a guide to Components of Financial Statements. Here we discuss the top 4 components, including income statement, balance sheet, cash flows, statement of changes in Equity with its format, and explanation. You may learn more about accounting from the following articles –