3.2 Basic Elements SFAC No. 6
An important aspect of developing a theory of accounting is the definition of terms.  SFAC No. 6 identifies and defines ten elements or terms that describe categories of accounting information.  The 10 elements along with brief comments about each element are shown in the following table.  Refer to your textbook for the "official" definitions of the elements.
Element
General Comments
Assets
  • Assets represent resources owned or controlled by a company as of the balance sheet date
  • Liabilities represent claims against the assets by outside 3rd parties as of the balance sheet date.
  • FASB describes both in terms of "probable future economic happenings" (i.e., receiving something or giving up something).
  • Both arise from a transaction that occurred on or before the balance sheet date.
Liabilities
Equity
Assets - Liabilities = Equity
  • This is a residual interest (i.e., what's left over and available for distribution to the owners of the entity).
Investments by Owners
Assets - Liabilities = Net Assets = Equity
  • Represents a resource of some type contributed by an owner to the entity.
  • Owners could contribute cash or resources other than cash.
  • Owners could forgive debt owed to the owner by the company.
  • Owners could contribute services (e.g., accounting or legal services) to the company.
Distributions to Owners
Assets - Liabilities = Net Assets = Equity
  • Assets could be given to an owner, thereby decreasing the owner's claim to the net assets of the company.
  • A company could pay an expense on behalf of an owner, thereby increasing liabilities and decreasing the owner's claim to net assets of a company.
Revenues
Typically inflows to the company during a period that arise from the delivery of goods or services to outside 3rd parties (i.e., sales of goods or services to customers)
Expenses
Typically outflows from the company during a period that are made because of the process of delivering goods or services to customers.
Gains
This is an economic measurement concept.
  • Gains arise when the company receives more than it gives up.
  • Fair market value > Net book value
Losses
This is an economic measurement concept.
  • Losses arise when the company receives less than it gives up.
  • Fair market value < Net book value
Comprehensive Income
This is a much broader definition of "income or loss" than the accountant normally uses.
  • Measurement of income or loss includes both "real" and "not-so-real" measurements (e.g., unrealized gains and losses on stock investments)
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