Balance sheet is the last step of final account. Balance sheet is a statement not an account. Thus, it has no debit and credit side. Balance sheet has assets and liabilities side. It is prepared after ascertaining net profit and net loss from profit and loss account. It is the summary of the personal account and real accounts having debit and credit balances. The debit balance of personal and real accounts are put on the right hand side called assets side, whereas the credit balance are put on the left hand side known as liabilities side.
Objective of the Balance Sheet
The main objectives of the balance sheet are as follows:
To show the financial position of the business at a given date.
To provide the information regarding trade debtors and creditors.
To provide the information about capital and owner’s equity.
To provide the detail information about the value and nature of assets.
To make easier for borrowing loan from outsider.
Importance of Balance Sheet
It helps to ascertain the financial position of business on particular data.
It helps to decide the amount of provision or reserves which should be created for meeting the future contingencies.
It helps to ascertain the owner’s equity.
It provides information about a business's liquidity, or ability to pay its debts when they have to be paid.
It provides information about the breakdown of assets into current assets, fixed assets and other assets, with details about the amount of assets within each of these broad categories.
Preparation of balance sheet
The following is the specimen of balance sheet:
Capital and liabilities
Capital: Add: Net profit XXX Less: Net loss XXX Add: Interest on capital XXX Less: Drawing XXX Reserve and surplus: General reserve, reserve fund Long-term liabilities: Long term loan Current liabilities: Sundry creditors Bills payable Bank overdraft Income received in advance Outstanding expenses
XXX XXX XXX XXX XXX
Fixed assets: Goodwill Land and building Plant and machinery Furniture, fixture and fittings Motor vehicles Patent and trade mark Investment Current assets: Closing stock Insurance company (Compensation) Sundry debtor Bills receivable Short-term investment Prepaid expenses Accrued income Cash at bank Cash at hand Marketable securities
XXX XXX XXX XXX XXX XXX XXX
XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
Items that appear in Assets Side of Balance Sheet
Assets: Assets are valuable resources owned by a business which are acquired at a measurable money cost.
Classification of Assets
The assets are classified as follows:
Current assets: The resources of the business which can be converted into cash within a period of twelve months are classified into current assets. It includes the assets such as cash in hand, cash at bank, closing stock, debtor, bills receivable or accounts receivable, marketable securities, etc. that are acquired and are to be converted into cash in the ordinary course of business. Current assets are sub-divided into two parts as:
Liquid assets: These assets can be converted into cash without appreciable loss. E.g. cash in hand, cash at bank, debtor, bills receivable, etc.
Non-liquid assets: These assets cannot be readily converted into cash or not without appreciable loss. E.g. stock and prepared expenses.
Fixed assets: The assets of the business which are acquired for long term use but not for sale purpose are known as fixed assets. For e.g. land, building, furniture, fixture, plant and machinery, equipment, etc. Fixed assets are sub-divided into three parts as:
Tangible fixed assets: Those fixed assets which can be seen and touched are known as tangible fixed assets. For e.g. building, machinery, furniture, motor vehicles, etc.
Intangible fixed assets: Those fixed assets which cannot be seen and touched are known as intangible fixed assets. For e.g. goodwill, copy-right, trademark, etc.
Fictitious assets: Those assets which are not represented by concrete or tangible. For e.g. preliminary expenses, debit balance of profit and loss account, etc.
Items that appear in Capital and Liabilities Side of Balance Sheet
Liabilities: Liabilities is an obligation of business to pay a third party in respect of goods or service on pursuit of its activities. It involves the claim of outsiders against the business.
Classification of Liabilities
The liabilities can be classified as follows:
Long term liabilities: These are long-term liabilities which are generally paid after a long period of time such as long-term loan, debenture of a company, etc.
Current liabilities: A liability which is expected to have been paid within one year from the date of the balance sheet is termed as current liability. For e.g. sundry creditors, bills payable, bank overdraft, outstanding expenses, short-term loan, etc.
Contingent liabilities: Contingent liabilities are the liabilities which are not the liabilities of a firm on the date of the balance sheet but may become liabilities in the future on happening of the uncertain event.
Capital: Net profit is added to the capital and net loss is deducted from capital which is transferred from profit and loss account.
Reserve and surplus (Undistributed profit): The business man decides to create reserve or fund for a particular purpose of business. Such reserves are normally created for those expenses which fluctuated from year to year. It is created for the future contingency on business.
Arrangement of Assets and Liabilities in Balance Sheet
The assets and liabilities may be arranged in any of the following two orders:
In the order of Liquidity: According to this basis, assets are arranged in order of the case with which they can be converted into cash. Here, the cash in hand will come first then cash at bank followed by other assets and land and building at the bottom of the list. Similarly, liabilities are arranged on the order they are to be discharged. Bills payable appears first, then trade creditors and followed by loans, outstanding expenses. Thereafter, reserve and surplus will appear and capital at the bottom.
In the order of permanence: According to this basis, assets are listed in order of permanent. First of all, the most permanent assets such as goodwill, customers, etc. are written followed by other fixed assets. The most liquid asset such as cash in hand is written as a last item. Similarly, on the liabilities side at first the most permanent liability is shown i.e. capital followed by fixed and long term liabilities and the current liabilities which are to be paid first.
Difference between Trial Balance and Balance Sheet
It is prepared to check the arithmetical accuracy of account record.
It is prepared to know the financial position of the business,
It may be prepared whenever required i.e. fortnightly or monthly or yearly etc.
It is prepared at the end of the accounting period.
It has debit and credit column.
It has assets and liability side.
Need of preparation
It is not necessary through desirable.
It is necessary through desirable.
Order of preparation
It is prepared before the preparation of final account.
It is prepared after the preparation of Trading and P/L account.
Sharma, Narendra et.al., Principles of Accounting-XI, Bundipuran Prakashan, Kathmandu