Meaning of Financial and Equity Intruments

Financial instruments are contractual instrument which when executed becomes, an asset in the books of one entity and liability in the books of another enitity (where both the entities are party to the contract).

On analysis of the definition we will come to understand that, a financial instrument has following characteristics:

1. Contractual instument
2. Financial obligation or right

Financial assets are : 

1. Cash and Bank Balance 
2. Right to receive cash
3. Equity instuments in other entity
4. Right to receive equity instruments in other entity 
5. Derivative contracts, favourable for entity

Financial liabilities are : 

1. Obligation to deliver cash
2. Obligation to deliver other financial assets
3. Obligation to deliver variable number of own equity
4. Derivative contracts, unfavourable for entity
   

Equity instruments are the instruments which gives residual interest in the net worth of the entity or it is contractual obligation to deliver a fixed number of equity shares.

We should note that, statutory obligation to deliver cash will not be classified as financial liability because it do not arise on account of some contract.