What is 'Articulation in Accounting'?
What is 'Articulation in Accounting'?

Articulation means that the balance sheets and the income statements of any company are mathematically described in such a manner that the net income equals the owner’s equity for that specific time period.

The flow of information in between the balance sheets and the income statements is said to be articulation. It means that the financial statements should be prepared in such a manner that the information can flow or articulate in a correct manner.

The financial statements don’t form any separate entity. There should be a proper flow of information to generate a bigger picture with the sets of this information. The flow of information between the various entities or articulation is further described with the help of certain terms:

 

Balance Sheet:

It is directly linked to the income statements, statements of cash flow, and changes in the equity. This tells the balance of assets, the various liabilities and the amount of equity in the start and end of the year.

The Income statements:

They contain the information telling about profit and the loss. It is linked to the balance sheet, cash flow statements, and changes in the equity. An increase or any decrease in those net assets in the form of profits or losses are present in those income statements and also in those balance sheets of a company.

Changes in the equity:

These statements are also directly linked to those income statements and those balance sheets of a company. The statements of the changes in values of equity are presented on the balance sheets.

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Cash flow statements:

They tell about changes in the capital reserves, the changes in the retained earnings obtained from those profits or losses, changes in loans, changes in a capital that are presented on the balance sheets and the changes in a company’s assets from those investing activities.

Articulation:

These financial statements do not form a separate item. They are directly linked to the flow or articulation of information between one another to show a bigger picture of any business financial status. Each of the statement can present a little view of information. But if there is no flow or articulation, these little views in themselves have no such value.

The balance sheets get related to the cash flow statement, statements regarding changes in the value of equity and the income statements. The increase and decrease in the net assets due to profits or losses are recorded in income statements are also reported in specific time-period balance sheets.

The profits or losses in income statements are also recorded in those cash flow statements. Net profit and loss get mentioned in those statements of changes observed in the equity. This statement is closely related to the income statements and that balance sheet. These statements of change in equity show the flow of the equity as presented in those balance sheets.

The changes in equity get to be reported in such statements pertaining to income. A cash flow statement forms a link with those balance sheets.

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Hence, you notice how each entity is providing information for the other entity to be properly described. The process of articulation is very important to give a complete meaning to any set of information.

These statements of change in equity show the flow of the equity as presented in those balance sheets. The changes in equity get to be reported in such statements pertaining to income.

A cash flow statement forms a link with those balance sheets. Hence, you notice how each entity is providing information for the other entity to be properly described. The process of articulation is very important to give a complete meaning to any set of information.

Hence, you notice how each entity is providing information for the other entity to be properly described. The process of articulation is very important to give a complete meaning to any set of information.

There are very important articulations to consider when preparing the respective financial statements. The statements should be prepared in a very orderly manner to allow the information to flow or articulate correctly.

The income statements should be made to prepare first. Net gain or net loss flows to the statements of the retained earnings. The ‘ending balance’ from the retained earnings flow to the shareholder’s equity in those ‘balance sheets’.

In summary, the financial statements do not have a separate existence. They articulate with each other for a broader picture of the company’s financial status.