The two statements thus separated do not lend themselves easily to a comparison of individual items. Accordingly, a method of showing the comparison known as the “Comparative Balance Sheet” form is used. This brings all the data into juxtaposition and so makes comparison easy. The balance sheet for the current year is shown first, followed by that for the preceding year. The increase and decrease column uses the current year as a basis for comparison with the preceding year.
Aaron Conners
Comparative Balance Sheet,
June 30, 1922 and June 30, 1921
| Assets | 1922 | 1921 | Increase and Decrease | ||
| Current Assets: | |||||
| Cash | $ 850.00 | $ 1,000.00 | - | $ 150.00 | |
| Notes Receivable | 100.00 | 250.00 | - | 150.00 | |
| Accounts Receivable | 6,425.00 | 5,250.00 | + | 1,175.00 | |
| Merchandise | 10,260.00 | 8,500.00 | + | 1,760.00 | |
| $17,635.00 | $15,000.00 | + | $ 2,635.00 | ||
| Fixed Assets: | |||||
| Store Fixtures | $ 472.50 | $ 525.00 | - | $ 52.50 | |
| Delivery Equipment | 350.00 | + | 350.00 | ||
| $ 822.50 | $ 525.00 | + | $ 297.50 | ||
| Total Assets | $18,457.50 | $15,525.00 | + | $2,932.50 | |
Liabilities | |||||
| Current Liabilities: | |||||
| Accounts Payable | $ 6,192.75 | $ 5,365.00 | + | $ 827.75 | |
| Notes Payable | 950.00 | 1,250.00 | - | 300.00 | |
| Accrued Salaries | 50.50 | + | 50.50 | ||
| Total Liabilities | $ 7,193.25 | $ 6,615.00 | + | $ 578.25 | |
Net Worth | |||||
| Aaron Conners, Capital | $ 11,264.25 | $ 8,910.00 | + | $2,354.25 | |
While it is true that a great deal of valuable information can be secured from a comparative balance sheet, and that this form of balance sheet locates definitely the changes in the asset and liability items, summarizes those changes, and shows the net profit, it nevertheless fails to disclose the forces within the business organization which have brought about the changes—it sets forth effect or result but not cause. A supplementary or rather a complementary statement is needed to show the reasons for the changes. This is discussed in the following two chapters.
CHAPTER V
THE ECONOMIC OR PROFIT AND LOSS
ELEMENTS OF A BUSINESS
Fuller Information Needed.—As indicated in [Chapter IV], in the summarization of the business transacted during a given period, it is not usually sufficient to know how much net worth has changed; nor is the whole story told when it is known exactly what items are responsible for the change, that is, which of the properties are worth more and which are worth less at the end than at the beginning of the period. Additional information is necessary to account for the changes shown by the comparative balance sheet.
The proprietor who knows simply that his cash is $1,000 less now than it was at the corresponding time in the last fiscal period, has not the kind of control over his business that his competitor has who knows that the $1,000 was expended for an increased stock of goods, or that an outstanding liability of that amount has been settled, or that his expenses for the period have been larger by $1,000 than for the former period. His competitor may be worse off but he at least has the advantage of knowing the reason for his being so. He has made a correct diagnosis of the pulse beat of his business. If he cannot heal its ills or secure aid for it, he can at least have the satisfaction of giving it a respectable burial, and the autopsy will then disclose that he failed to take advantage of his information until it was too late.
However, the point should be clearly held in mind that the proprietor who knows exactly what is happening in his business is in a position to exercise a definite and sure control over it. Hence, the accounting department, to justify its existence, should aim to give full information as to what is taking place within the business and what eventually will be the result in its financial life. Only in this way can the department serve as a means of control.
Kinds of Records.—A business must have assets and usually must incur liabilities; a plant must be used, stock-in-trade must be bought, and sold, and usually sufficient capital must be provided for the extension of credit to customers. Capital for the payment of the operating expenses of the business, the maintenance of the plant, the payment of salaries and wages of employees, and so forth must at all times be provided. While it is true that the balance sheet shows the financial condition of the business, it gives little information as to the volume of business operations. It indicates the net worth and may even indicate the increase or decrease in net worth if the comparative balance sheet is used. Yet as to how that increase or decrease in net worth came about, little or no information is given. The balance sheet, in other words, is static; it indicates a quiescent state. It is a snapshot, showing the wheels of business momentarily stopped.
To give a full survey of the operations during a given period, a motion picture of the events between the dates of the balance sheets must be shown. Such a picture is dynamic. It gives a realization of the whirl and bustle of business being carried on. It pictures volume, content, and extent, whereas the balance sheet indicates the state arrived at as of a given moment. For purposes of management, which must control all the phases of business activity, a balance sheet is insufficient. A review of the factors producing results up to a given time must be had. Accordingly, the accounting department must supply not only information as to the present state of the assets and liabilities, but also information which indicates how the changes in assets and liabilities since the last fiscal period were brought about—what volume of transactions occurred, what expenditures of assets and energy were necessary to accomplish the results attained. This information, for purposes of internal management, is more vital than that concerning simply the present status of assets and liabilities. It is complementary to that obtained by a comparison of net worths and it is therefore explanatory of the changes in net worth.