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  Different Roles

Introduction to Different Roles

The statement of financial position and the income statement should not be viewed in any way like substitutes for one another. Rather they should be observed like performing different roles. As we have described the statement of financial position, sets out the position at a single moment in time: it is a 'snapshot' of the make-up of the wealth held through the business. Alternatively, the income statement is regarded with the flow of wealth over a period of time. Though, the two statements are related closely.

At the beginning the income statement connects the statements of financial position and the end of an accounting period. So, at the beginning of a new accounting period, the statement of financial position depicts the opening wealth position of the business. After a suitable period, an income statement is ready to depict the wealth produced over that period. A statement of financial position is then also ready to reveal the new wealth position at the end of the period. This statement of financial position will imitate the changes in wealth that have acquired because the previous statement of financial position was drawn up.

As we defined earlier that the influence on the statement of financial position of making a profit (or loss) the meaning of this is that the accounting equation can be extended like this:

Assets (at the end of the period) = Equity (amount at the start of the period+ profit (or - loss) for the period) + Liabilities (at the end of the period)

The amount of profit or loss for the period influences the statement of financial position like an adjustment to equity.

The above equation can be extended like this

Assets (at the end of the period) = Equity (amount at the start of the period)

+ (sales revenue - expenses) (for the period)

+ Liabilities (at the end of the period)

Theoretically, it would be feasible to compute the profit (or loss) for the period by making all adjustments for revenue and expenses by the equity section of the statement of financial position. Though, this would be rather burdensome. A good solution is to contain an 'appendix' to the equity section, in the form of an income statement. Through deducting expenses from revenue for the period, the income statement gets the profit (or loss) through which the equity figure in the statement of financial position requires to be adjusted. This profit (or loss) figure demonstrates the net effect of trading for the period. Through providing this 'appendix', users are presented along with a detailed and more informative view of performance.

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