Neglected income statement;

              18 HASKINS & SELLS March
The Neglected Income Statement
WRITERS on the subject of account­ing
generally have centered their
attention and discussion on the balance
sheet. This is perhaps but natural, as the
balance sheet constitutes a summary which
organizes the aspects of financial status and
is the capstone of financial data.
The income statement has not received
the attention which it merits, either in the
light of its value as a means of effective
administration or as to the philosophy
underlying it. From the promiscuous as­sortment
of income statements available,
published and otherwise, one may reason­ably
receive the impression that its growth
has been somewhat like that of Harriet
Beecher Stowe's "Topsy."
Following the historical development of
the present form of statement one sees,
first, a grouping of the loss and gain ac­counts,
which generically may be called
measurement accounts, in a statement tak­ing
account form. This represented little
more than a classification of the positive
and negative forces affecting the business
capital so as to show the net effect thereon.
Next came the influence of the railroad
accountants who introduced the running
form and attempted to set off the profit at
one or two points, in order to relate the
profit to certain sources. Later is seen the
stamp of certain public accountants, fol­lowed
by that of the university schools, in
bringing out refinement in classification
and grouping and recognizing a more scien­tific
basis for income accounting.
The bookkeeping theory of the profit and
loss account in which the income statement
had its origin is that the profit and loss
account shows the accretions or decretions
of capital through gains and losses, not only
those growing out of the manipulation of
capital with a view to gain but, in addition,
those gains and losses which, while not im­mediately
related to the main purpose of
the business, are incident thereto.
In other words, the capital is invested
part in property, in equipment, and in
goods. Amounts invested in goods, as the
ownership of the goods is transferred to a
purchaser, have attached to them an addi­tional
amount which is intended to com­pensate
the seller for his expense in obtain­ing,
making available, and handling the
goods, and afford him a margin of profit.
Thus, by carrying into the profit and loss
account the sales price of the goods on one
side, with the cost of the goods and the ex­pense
connected with obtaining, handling,
and disposing of them on the other side,
the amount of profit is, by a balancing
process, ascertained.
But the property and equipment in
which some of the capital was invested wear
out, and the capital would thus become
depleted were this factor not to be pro­vided
for. Hence, by making such provi­sion
out of profits the profits are reduced.
Again, some of the capital invested in goods
or in property and equipment may have
been borrowed, and interest must therefore
be recognized as a factor which affects the
profits. On the other hand, some of the
goods may have been sold on a basis of
time, and there is interest to be collected
and treated as an offset to the interest paid
for money borrowed.
Out of this rather intricate mass of influ-