Balance Sheet
Companies are required to prepare a certain number of compulsory documents called financial statements. One of these is called the balance sheet, yet it is neither a balance nor a sheet, and balance sheet together means nothing. They could have called it an ‘equilibrium blanket’, which would have been just as silly. A balance sheet is simply a list of assets and liabilities including equity. It should be called what it is: a statement of assets, liabilities and equity, but accountants decided to put together these two rather bizarre nouns, instead.
But to be fair, before computers were invented, the books (term that accountants use for accounting records) had to be balanced and a trial balance prepared before completing financial statements. Therefore, there is some accounting logic in the word ‘balance’ in balance sheet. But there is none for sheet. It has no relation to beds or pillows. Although accountants may have made the connection to the sheet of paper the numbers had to be written on. As you can see, we accountants are complicated, (not to use another more expressive adjective).
But I discovered while reviewing the financial statements of some quoted companies, I am not alone in thinking the term balance sheet is ridiculous. Many companies still prepare their group and consolidated balance sheets as part of their financial statements. But some have decided to use another expression. They no longer prepare balance sheets. They prepare group and consolidated statements of financial position. This is still rather a vague term, but more concise than balance sheet.
P/L Account
In my youth as an accountant, I prepared a ‘profit and loss account’ for my clients, shortened to P/L account. This too was illogical because a company cannot have both a profit and a loss at the same time. They either have a profit account or a loss account. Understandably, this term has evolved over time to the modern version called a statement of profit OR loss, (my capitals) and a few companies still believe in this term, but they are now in a minority.
Most companies now call it income statement. Accountants have substituted income and changed account to statement. This too is illogical. Profit is not income, and an income statement includes expenses so is not an income statement either. It should be an income and expense statement. But then, you already know that accountants are complicated.
Cash Flow
Another of the compulsory documents as part of the financial statements is the cash flow statement. Cash never flows. A river flows. When you turn on the tap, water flows. Cash flow is neither continuous nor can it be turned on and off at will. This imagery of cash flowing is misleading. Organisations and people in general have to fight for their cash. ‘Cash fight’ would be a better term, or cash flight because it is easier to spend than to collect. Even simpler would be ‘cash in/out’. But cash flow has been used so much it is part on accounting jargon.
In addition, accountants cannot agree whether the flow is singular or plural. Some companies prepare a ‘cash flow statement’ while others prepare a ‘statement of cash flows’, yet the two statements are identical.
