Accounting Elements

In the one liner, there are five basic elements which make up the entire set of the financial statements. The permanent elements in relation to the financial statements are the assets, liabilities, equity. However, the temporary ones are the incomes and the expenses. They are set out and explained in the two frameworks that are globally applied in relation to the financial statements preparation that is the Generally Accepted Accounting Principles (GAAP), and the International Financial Reporting Standards (IFRS).

Permanent versus Temporary Accounts

The rationale underlying the broad classification of the elements is that the temporary accounts are closed in relation to each reporting period, however, the permanent accounts are carried forward to the next reporting period. For instance, Rent is a temporary account and has the expense nature. Each year it is closed down in the retained earnings account and the final balance is nil. On the other hand, Property is a permanent account and it is carried forward to the next year. You would have observed this phenomenon as well. Whenever you are going for the accounting transactions in relation to new financial year, you would have found that there is no opening balance in relation to the accounts that are either incomes or expenses. On the other hand, each of the account that is either asset, liability or the equity has a specific opening balance unless it is a new element that is recognized in the current financial year.

Primary Accounting Elements

The coming paragraphs would pour light on the basic elements of the financial statements. You may call the elements of the financial statements as the building blocks of the financial statements.

Assets

The most important element of the financial statements. They make up the left hand side of the accounting equation and are the resources of the organization that is utilized in relation to the operations and then earn profitability. Assets are further classified as the current assets and the non-current assets. The basic difference is that the later yield benefits for more than one year.

Liabilities

Liabilities together with the equity is what equates the Assets on the left hand side of the accounting equation and this elements represent the claims of third party in relation to the business. Likewise the assets, liabilities are also further classified as the current liabilities and the non-current liabilities, later being the claims that will not be completely settled in the one year time from the reporting date.

Owner’s Equity

Owner’s Equity is the claims of the owner in relation to the business. It is also referred to as the Capital.  Owner’s Equity together with the Liabilities is what equates the Assets on the left hand side of the accounting equation. Equity has many further classifications and the determinant of the classifications is the size of the organization. For instance, sole proprietorship has only capital line-item making up the entire Equity. However, in relation to the Corporations, Common Stock, Retained earnings and the treasury stock in aggregate may make the element owner’s Equity.

Incomes and Expenses

Incomes and Expenses are the temporary accounts and related to the primary operations of the organization. Assets are the resources which are utilized and further the operations of the organization and in the form of expenses and the result is referred to as the Income.