Lesson Objectives:- The nine elements of financial accounting
- How dividends fit into accounting concepts
- Application of each element in financial statements
- Examples of financial elements
At first glance, it may be overwhelming to think of all of the different accounts involved in financial accounting. Don't let this sea of concepts worry you, as we will be reviewing each element in depth over the course of this financial accounting class. The more practice, concepts and examples that you review; the easier it will be to memorize the financial accounting elements.
In this lesson I will guide you in helping to make sense of all of the elements including assets, liabilities, equity, revenues, expenses, gains, losses and other comprehensive income (OCI).
You will apply these concepts both in real life and in your accounting course work as they are the basic building blocks of financial accounting. These items are summarized and reported on financial statements in order to communicate the performance of the business.
Essentially, every transaction can be linked to one of these elements. When you are preparing records, you will likely be dealing with at least one of the financial accounting elements. If you compare them to the amino acids that build up the human body, these elements are the concepts that serve as the building blocks of financial accounting. The first three elements portray the current financial position of the business and are recorded on the balance sheet.
If you look at the simple example of a balance sheet above, you will find assets, liabilities and owners' equity. These elements are the fundamental factors behind what a business owns (assets), what obligations they are responsible for (liabilities) and the retained value (equity).
Let's take a moment to briefly explain each concept on the balance statement as we will be doing a deeper dive into assets, liabilities and equity in the next few lessons.
Assets are items owned by the business that add value and often serve a vital role in their continued success. Examples on the balance sheet include cash, inventory and equipment.
Liabilities are obligations to transfer something of value which is recorded through notes payable on the balance sheet. Other forms of liabilities include interest payable, warranty liability and unearned revenue.
Equity is the owners value that is retained after liabilities are paid. The balance sheet lists equity from the original investment along with retained earnings.
The next three elements including revenues, gains and losses are recorded on the income statement. Looking at the sample example income statement above, lets define each element.
• Revenues represent income that is earned through the sale of the business' products or services.
• Gains account for an increase in the company's position through a secondary source such as selling assets or investing.
• Expenses are the widest ranging category and can be related to costs including sales commissions, supplies, advertising and much more.
• Losses are virtually the opposite of gains as they involve the company losing money through secondary activities such a losing a lawsuit.
We will get into more detail on the concept of other comprehensive income (OCI) in a future lesson. Basically, OCI is the unrealized version of revenues, gains, expenses and losses. This means the transaction can be quantified but it has not been completed yet.
Examples include unrealized gains or losses from assets listed for sale, foreign currency transactions, discontinued operations and pension plans.
Take a look at the example above. The red circle indicates where the OCI value is recorded on the comprehensive income statement.
Dividends are often considered a ninth element, as it is an important concept of financial accounting that records the distribution of a corporations earnings to it's shareholders. The dividends paid out are recorded on the retained earnings statement. See the example above. The dividends section is circled in red.