MAY BE THE Balance Sheet More Important COMPARED TO THE Income Statement?

International Financial Reporting Standards (IFRS). The income declaration provides a overview of the organizations expenses and income for a specific period. Historically this was the first report the user of financial statements viewed (if not the only report), to establish if the business is worth investing in. To numerous non-financial people, the total amount sheet does not make sense in any full case, so they gravitate to the only report that is an easy read, namely, the income statement.

Assets and liabilities are just too complicated, to grasp. In the last ten years roughly, this has changed, so much so that readers and users are advised to lend significantly more credence to the total amount sheet than the income declaration. This “discrimination”, exacted on the income declaration is so severe that some traders should even disregard the income statement as a whole.

Why is this so? It could be the fiddling with revenue numbers by many, now defunct corrupt corporations, which reported highly profitable statistics, whilst these businesses were intensely indebted (liabilities), or technically insolvent. Moreover, high revenues are no guarantee against bankruptcy. Historically, money statement was used first, and the balance sheet, second.

The balance sheet became the “rubbish bin”, for all items that could not balance the books. IFRS implemented the converse now, the total amount sheet is drawn up first, and the income statement now becomes the “rubbish bin”! The total amount sheet first, method has more to do with accurate reporting, than other things, and is supported by many accounting experts. Equity, is the real important thing, not “earnings”.

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Capital growth is exactly what any trader should be thinking about. Any home based business, in reality is constructed from its “balance sheet”, first. Capital is invested, loans are sourced, inventory is acquired, and a bank account is opened. Only after all of the aforementioned has been established do the continuing business start to generate revenue, and incur expenses.

Balance sheet items are reviewed meticulously and ready first. Accountants will audit fixed assets, current assets, current liabilities, loans and investments. Applying the asset-liability formula, an instant assessment is made of equity. If the equity balance is broken up in stockholders funds or capital, less maintained income, an ongoing revenue is made before even taking a look at income or expenditure items quickly!

An income declaration should then be ideally be build from “the bottom, up”. The profit or loss should then be modified (added), to expenses, and a revenue figure shall be determined. If any variances are identified, as of this juncture, it is an income statement problem, not the total amount sheet. Balance sheet information is sacrosanct.