Elements of financial statements

An important aspect of developing any theoretical structure is the body of basic elements or
definitions to be included in it. Accounting uses many terms with distinctive and specific
meanings. These terms constitute the language of business or the jargon of accounting.

The elements directly related to the measurement of financial position are assets, liabilities, and
equity.

o Asset: A present economic resource controlled by the entity as a result of past events. (An
economic resource is a right that has the potential to produce economic benefits).
o Liability: A present obligation of the entity to transfer an economic resource as a result of
past events.
o Equity: The residual interest in the assets of the entity after deducting all its liabilities.

The elements of income and expenses are defined as follows.

o Income: Increases in assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.
o Expenses: Decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims.