In addition to the measurement accounting principles that guide the values placed on the elements included in the balance sheet, there are accounting principles specifying the informative disclosures that are necessary because, without the information they provide, the financial statements would be misleading.

The following five disclosure techniques are used in varying degrees in contemporary financial statements:

  1. Parenthetical explanations

  2. Notes to the financial statements

  3. Cross‐references

  4. Valuation allowances (sometimes referred to as “contra” amounts)

  5. Supporting schedules

Parenthetical explanations

Information is sometimes disclosed by means of parenthetical explanations appended to the appropriate balance sheet caption. For example

Common stock ($10 par value, 200,000 shares authorized, 150,000 issued)$1,500,000

Parenthetical explanations have an advantage over both notes to the financial statements and supporting schedules. Parenthetical explanations place the disclosure prominently in the body of the statement instead of in a note or schedule where it is more likely to be overlooked.

Notes to financial statements

If the information cannot be disclosed in a relatively short and concise parenthetical explanation, a note disclosure is used. For example

Inventories (see note 1)$2,550,000

The notes to the financial statements would contain the following:

Note 1: Inventories are stated at the lower of cost or market. Cost is determined using the first‐in, first‐out ...

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