Losses in Asset Values Summary

This Section of the website has been concerned with the accounting procedures for preparing and presenting the two main financial reports, namely, the income statement and the balance sheet.

The extraction of the trial balance at the close of the accounting period marks the first stage in the preparation of these reports. Earlier webpages have examined the adjustments required for the purposes of periodic measurement. These include accurals, depreciation and adjustments in respect of bad and doubtful debts. All these adjustments are effected informally on working sheets, and once they have been verified and confirmed, the final accounts may be drawn up.

The importance of the income statement lies not only in the fact that it is the main vehicle of periodic measurement and provides the measurement of periodic income, but also in the fact that it is itself part of the accounts system. The objective purpose underlying the preparation of the income statement is the measurement of net income, which is used as a basis for measuring business efficiency. The distinction between gross income and net income facilitates the analysis of the financial results, as does the classification of expenses under various categories.

By contrast, the balance sheet is a list of residual balances following the preparation of the income statement. It forms no part of the accounts system. The balance sheet is used in conjunction with the income statement in the analysis of the financial performance of the business, and the treatment and classification of assets and liabilities is important to this analysis. Consequently, particular attention is paid to the manner in which important financial aspects of the business are highlighted in the presentation of the balance sheet.


Next - Employees in 2015

Read on: The Formal Presentation of the Balance Sheet

The formal presentation of the balance sheet

In the case of corporations, legislation usually provides rules for the presentation of both the income statement and the balance sheet. These rules apply to published financial reports. The rules reflect the recommendation of the accounting profession, and are designed not only to secure sufficient disclosure, but to permit salient features to be quickly recognized. It is usual, therefore, to classify assets and liabilities in groupings as we mentioned earlier, and also to rank them according to liquidity. Thus, asset groupings are shown from... see: The Formal Presentation of the Balance Sheet