It will be noted that the sides of the capital account follow the debit and credit order of the ledger, whereas the general balance sheet reverses that order—an inconsistency for which even the English do not attempt explanation.
Balance Sheet Titles
The title of the balance sheet is fairly well standardized. Other titles are sometimes met, such as Financial Statement; Statement of Assets and Liabilities; Statement of Resources and Liabilities; Statement of Assets, Liabilities, and Capital; Statement of Financial Condition; etc. The title “Balance Sheet” seems best. Though not so fully descriptive as some of the other titles, it is generally understood and has not the objection of inadequate descriptiveness and unwieldiness often raised against the other titles. There is a similar variation in the titles used for the three main groups of items shown in the balance sheet, viz., assets, liabilities, and net worth. Obviously, portions of some of the general titles cited apply here with equal appropriateness. In addition, we find in use or suggested as appropriate, Property and Assets, Active and Passive, Debit and Credit, Positive and Negative, Proprietorship, Capital and Surplus, Capital, etc. None of these suggested titles have met with favor in practice, but they have served the worthy purpose, perhaps, of providing fuel for academic controversy. The titles, Assets or Resources, Liabilities, and Net Worth or Capital, seem thoroughly established and seem to cover the need.
Grouping and Classification
In the matter of classification and arrangement of the items under these main groups there is room for greater diversity both in practice and in theory. The need and purpose of classification and arrangement is obvious. While any statement, list, or schedule which shows assets, liabilities, and net worth may properly be called a balance sheet, only by a careful grouping and formulation of the items can their mutual interrelations and proper dependence be shown. Not only does the bringing of similar items into groups put them in proper perspective, but the arrangement of the groups to show their relations to one another makes for a more intelligent interpretation of the balance sheet. The controlling principle underlying classification of the items into groups is, in the main, their relative degrees of liquidity. Sometimes other factors, such as emphasis, perspicacity, publicity, and so on, bring about groupings which differ somewhat from those based solely on degree of liquidity. Thus it may be desirable to call particular attention to, say, the permanent investments of a concern, to the condition of its sinking and other funds, to the amount of new construction and betterments for the current period, or to the values tied up in intangible assets. No hard and fast rule can therefore be followed; elasticity, flexibility to the desired purpose are working rules which must underlie any scheme of classification.
As to titles for the various groups, one finds many. The current assets are variously styled Quick, Floating, Liquid, Circulating. As a sub-group under Current or as a separate group we find Working and Trading assets. Other groups are Fixed or Capital, Investments, Sinking and Reserve Fund Assets, Deferred Charges to Operation, Deferred Assets, Deferred Debits, Suspense Debits, with similar titles for corresponding credit items, Contingent Liabilities—in short almost any title which seems best to fit the needs of the particular case. Some of these may need some explanation.
The distinction between current and working assets is a somewhat fine-drawn one, although well taken under certain circumstances. Where the two groups are used, current assets include the cash, receivables, and temporary investments, and the working assets group (or working and trading assets as it is sometimes captioned) includes the stock-in-trade (finished goods, goods in process, and raw materials), supplies of all sorts used in preparing the goods for sale or in making the sale, office supplies, working funds in the hands of branches and agents, and the like. The line of demarcation between the two groups is not always clearly drawn, some placing the stock-in-trade among the current assets, others putting finished stocks in the current group and process materials in the working group. There is apt to be an overlapping also between the working and the deferred charges groups, supplies of various sorts often being treated as deferred charges to operation. Capital assets are fixed assets—the plant and those assets in which the capital must first be invested before revenue can accrue. When the group of capital liabilities is shown it usually includes both the long-term obligations incurred for raising capital as well as the capital stock. This unfortunately does not recognize a distinct section for the net worth items.
Arrangement of Groups
The arrangement of the groups among themselves, while showing variations, offers few important matters for consideration. Here, also, the principle of degree of liquidity controls. The arrangement is sometimes from fixed to liquid but rather more frequently from liquid to fixed. If the chief interest in the balance sheet is as to the amounts of capital invested in properties and the growth of such investments, it is claimed that the fixed asset group should be shown first. This might be the case with railways, steel corporations, and other large concerns wherein the ratio of the fixed assets to the current is large. In other concerns—and these constitute the larger number—chief interest centers in the current group. Here, the ability to pay dividends, to extend a sales market through carrying larger stocks of merchandise, to secure credit, are the items of chief moment. It is contended that in these cases, the order of the groups should be from current to fixed.
Whatever grouping is made for the assets, a similar arrangement of groups must be insisted upon for the liabilities; it is the placing in juxtaposition or the same relative positions of similar groups among the assets and liabilities which makes for an easily intelligent reading of the statement. After all, the order of the groups, as from fixed to current or vice versa, is of small importance in comparison with the similar arrangement of both assets and liabilities and with the surety of the proper content of each group. The thing to be sought is the arrangement which will facilitate comparison of similar groups. A rather serious objection to the “fixed to current” arrangement is that it almost invariably necessitates the separation of the net worth elements. Thus, capital stock and long-term bonds are grouped together at the top for comparison with the fixed assets; the remainder of the net worth—surplus and reserved profits—must be shown at the end. The group of all net worth items together compels a general scheme of logical grouping from current to fixed.