From balance sheet to income statement: a study of a transition in accounting thought in the USA, 1926‐1936

Abstract

This is a study of the relative focus on the balance sheet and income statement in The Accounting Review (TAR) and the Journal of Accountancy ( JA) during the period, 1926-1936. Perhaps the most significant change in accounting thought in the twentieth century has been the change in focus from the balance sheet and asset measurement to the income statement and income measurement that occurred sometime during the first half of the century. Midcentury accounting theorists (Paton, 1943;May, 1943) attribute the change from a balance sheet focus to an income statement focus with being the source of some of the most important and fundamental ideas of contemporary accounting.The real issue is the focus on asset measurement versus income measurement rather than the focus on the statements. The dominance of asset or income measurement has frequently been used to justify enhancing the "quality" of one of these two accounting elements at the expense of the "quality" of the other element given that statements must articulate (Garner, 1955, p. 306)[1]. Among those measurement practices are historical cost, matching expenses with revenues, and assets as pools of costs to be consumed in future operations. Garner (1955, p. 306) went so far as to state, "After a consideration of these factors there is little wonder that many authorities have noted that the method of stating the income of a company over a period of years has become in recent times a determining factor in its operating policy."With some exceptions, authors that have commented on the transition suggest that the focus on the income statement began to increase in the 1920s and became more important than the balance sheet sometime during the period

The Effect of Regulation on Statement Disclosures in the 1915 Moody's Manuals

“…The results of this study also call into question the conclusion by some previous authors that the income statement did not become a consistent, prominent, and useful disclosure until after 1920 [Skinner, 1987;Buckmaster and Jones, 1997]. The income statement was more commonly disclosed than the balance sheet by the entire sample considered in the current study.…”

“…Approximately 80% of the sample reported an income statement. This finding is inconsistent with the conclusion in the existing literature that the income statement did not become a consistently reported item in the U.S. until the 1920s [Skinner, 1987;Buckmaster and Jones, 1997]. In fact, for the sample as a whole, the income statement is much more commonly reported than the balance sheet.…”

“…The importance of income statement versus balance sheet information has increased over time. A major shift from the balance sheet to the income statement occurred during the 20th century as the income statement began to be used to assess the ability of a firm to generate wealth [Buckmaster and Jones, 1997;Jones and Aiken, 1994]. The need for financial reporting may be better understood by investigating the causes of this shift in emphasis.…”

Financial Reporting in 1920: The Case of Industrial Companies

“…This table indicates that 56% of the sample provided an income statement and 74% provided a balance sheet. The considerably lower percentage of companies providing an income statement relative to a balance sheet is consistent with Skinner [1987] and Buckmaster and Jones [1997]. The existence of 26% of the sample that did not report a balance sheet is inconsistent with the literature that concludes that almost all U.S. firms published a balance sheet [Brief, 1987].…”

Italian Theories About Accounting Measurements From the Twenties to the Sixties: Looking for Underlying Tendencies

“…We should also add that, over the period considered, Zappa's studies contributed in Italy to progressively replace the static vision of financial statement, typical of the 19th century, with a dynamic notion (Alexander, Fasiello and Giaccari, 2017), in the same way as happened in Germany and in the United States (Buckmaster, 1997). The main purpose of the financial statements was no longer the determination of financial position, but the calculation of the period's income, a central theme in Zappa's vision (Canziani, 1994, p. 153;Galassi, 1996, p. 617), in order to explain, as accurately as possible, the formation of income itself.…”