Static vs. dynamic balance theory

Balance sheet theories present various views on the content and tasks of the balance sheet and income statement. Learn more about static and dynamic balance sheet theory in our article.

Static Balance Sheet Theory

Within the framework of static balance sheet theory, the balance sheet represents a snapshot that is used to determine net assets. Here, net assets are calculated by subtracting liabilities from total assets. In static balance sheet theory, profit is interpreted as an increase in assets, which emerges as a byproduct from comparing two consecutive balance sheets. In static balance sheet theory, a distinction is further made between liquidation statics and going-concern statics. Liquidation statics calculate the amount of liable assets of a company under the assumption that all assets are sold, thereby prioritizing creditor protection. In going-concern statics, it is assumed that the company will continue to operate, which is why the assets are differentiated according to their type of use (durable goods and consumables) and valued at their acquisition or production costs.

Dynamic Balance Sheet Theory

According to dynamic balance sheet theory, the purpose of the annual financial statement is to determine a comparable and timely profit size. The annual result is known to arise from revenues minus expenses, which, unlike static balance sheet theory, puts the income statement in the foreground. The display of the period's success is intended to serve as accountability to external stakeholders and is used internally to manage the company. Asset determination is secondary here, which also reduces the significance of creditor protection.