Financial Instrument
Accounting glossary · Understand, connect, apply
A financial instrument is a contract that creates a financial asset for one party and a financial liability or equity instrument for another.
Example
When a business issues a bond for cash, the investor obtains a financial asset and the issuer normally takes on a financial liability.
Remember the difference
A machine is a physical asset. A contract to receive cash for selling it can create a financial instrument.
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Prepared with AI assistance. Examples are fictional and simplified for learning.
Examples are simplified for learning. Where a term depends on US law, IFRS, US GAAP or a historical rule, check the context explained above and the requirements relevant to your course.
Study references: OpenStax financial accounting and managerial accounting. For reporting requirements, consult the applicable IFRS Standards or FASB guidance. US tax terms should be checked against the relevant tax-year IRS instructions.
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