4.1. Elements of financial statements All financial statements consist of classes or categories known aselements. There are ten elements:assets, liabilities, equity, contributed capital, revenue, expenses, distributions, net income, gains,andlosses. These elements are explained later in this tutorial or are covered in other tutorials. Assetsare the economic resources a business uses to accomplish its main goal (i.e., increasing the owners' wealth). Formally recognized assets must meet the following two conditions: they must represent a potential economic benefit that is assignable to a particular entity, and an event giving rise to the assignment must have occurred (i.e., a transaction resulting in an asset has already occurred). For example, if a company has purchased a piece of equipment and uses it to generate profits, it is considered as an asset. However, if the company just considers buying new equipment,it can't be deemed or recorded as an asset. 5. Basic accounting equation Before we can proceed with the basic accounting equation we need to understandclaims: A company's assetsbelong to theresource providers who are said to haveclaimson the assets. In other words, each asset has its own source provided by an owner or creditor. So, there can't be a claim without an appropriateasset and vice versa. Based on thisstatement, we can define the basic accounting equation as: Assets = Claims Claims are divided into two categories: Creditors' claims that are calledliabilities Owners' claims that are calledequity Taking this into account, the basicaccounting equation can also be presented as follows: Assets= Claims Assets= Liabilities + Equity Liabilitiesare debts and obligations of a company. Equityis what the company"owes" to owners. Equity is also callednet assetsorresidual equity. The amount of total assets minus total liabilities equals equity. Because equity equals the difference between assets and liabilities, it is also callednet assets. If a company goes bankrupt, liabilities are paid off first to creditors, while equity is the last to be distributed. Therefore, owners' equity is also calledresidual equity. Let us look at an example of the basic accounting equation. Suppose a company has assets of$800, liabilities of $300, and equityof $500. These amounts will be shown in the basic accounting equation as follows: Illustration 2: Example of basic accounting equation Assets = Claims Assets = Liabilities + Equity $800 = $300 + $500 6. Effects of transactions on the basic accounting equation Let us know examine how different transactions affect the basic accounting equation. We will take a look at several transactions separately. 1) Friends Company is created when the owners pool $5,000 into the business. The effect of the contributions on the accounting equation is as follows: