What is value added statement? Explain in brief the advantages of value added statement.

A value added statement (VAS) is a financial statement that shows how much wealth the business has created during a period and how that wealth is shared among the groups who helped create it:

• employees, as wages, salaries and benefits
• government, as taxes
• providers of capital, as interest to lenders and dividends to shareholders
• the business itself, as retained earnings and depreciation for maintenance and expansion

In short, the income statement shows profit for the owners only, while the VAS shows the wealth created for all stakeholders. In format, the first part works out value added (sales less bought-in costs, plus other income), and the second part shows how it is applied to the four groups above.

The advantages of a value added statement are as follows:

1. Shows the wealth created by the business: it measures the firm’s real contribution to the economy, not just the profit earned for owners. The total value added by all firms forms part of national income (GDP).
2. Team concept: it presents the business as a joint effort of employees, capital providers, government and management, and shows each group’s share of the wealth. This builds a sense of partnership.
3. Improves employee relations and motivation: workers can see how much of the wealth goes to them compared with other groups. This builds trust and reduces conflict with trade unions.
4. Basis for productivity bonus and incentive schemes: value added per employee, or per rupee of wages, is a fair basis for designing productivity-linked bonuses, because it reflects the wealth workers actually help create.
5. Useful for performance measurement: ratios such as value added per employee, value added to sales, and value added to capital employed help measure efficiency and productivity, and allow comparison over time or with other firms.
6. Helps in national income accounting: because value added links directly to national income, the VAS helps government and planners measure each firm’s or industry’s contribution to the economy.
7. Social responsibility reporting: it shows how much the company contributes to society through wages, taxes and returns, which supports social accounting and the firm’s public image.
8. Better information for all stakeholders: employees, government, lenders and investors can all see their share, while the traditional income statement mainly serves shareholders.
9. Simple and easy to understand: it is easier for non-accountants such as workers and the general public to understand than the profit and loss account.
10. Aid in decision making and planning: management can use value added trends to make decisions on pricing, wage policy, investment and expansion, and to identify which activities add the most value.

The VAS also has some limitations. It is not compulsory or standardized, so formats differ between firms and are hard to compare. It is not a substitute for the income statement, and value added can rise even when the firm is inefficient, for example through high prices.