Asset / Liablity versus Revenue / Expense Perspective
As a Normative Theoretical Backgroud for Financial Reporting
Ⅱ. Pros and Cons of Asset / Liability
Ⅲ. Pros and Cons of Revenue/ Expense
Ⅳ. Suggested theorical Backgroud for financial Reporting
Accounting has a long - standing debate about two alternative and competing approaches to doing financial reporting. The essence of balance sheet-based approach is that it views the proper valuation of assets and liabilities as the primary goal of financial reporting, with the determination of other accounting variables considered secondary and derivative. The principal implication from this perspective is that the determination of income statement amounts and especially earnings is governed by balance sheet considerations. The balance sheet approach, taken to its logical conclusion and extreme, prescribes that the correct determination of assets and liabilities completely determines earnings, where earnings for a given period is simply the change in net assets over that period (adjusted for distributions and contributions from equity holders).
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Although the above quote shows that the Boards have adopted the asset/liability theory, we perceive that many have missed the point that the asset/liability theory is really a theory of income measurement as well as financial position. We think Dichev may have misunderstood this dual nature because his paper frequently refers to the “balance sheet approach” as if the focus on assets and liabilities necessarily makes the income statement not only less important than the statement of financial position but also less important than it should be.