What is a BALANCE SHEET

BALANCE SHEET

The Balance Sheet may be defined as "a statement which sets out the assets and liabilities of a firm or an institution as at a certain date. All the assets account which have not been closed by transfer to either the Trading Account or the Profit & Loss account must appear in the balance Sheet otherwise the two side of the balance sheet will not agree and it will not reflect the correct financial position of the business.

 The Balance Sheet similarly is required to give true and fair view of the financial position at the end of the year

The study of the Balance Sheet enables the person to judge whether the firm or institution is financially sound or not.

The Balance Sheet records on one side what the firm or institution possesses, called assets. Assets may be convertible in to cash or they may be enable the firm to carry on it work (for example patents which permit goods of a certain type to be produced) or the firm may enjoy some benefits without further payment (like insurance premium relating to the next year.).

On the other side it records the source from which the necessary funds have been derived - contribution by the proprietors (capital) and loan raised and credit received from outsiders.

The Profit and Loss Account and Balance Sheet are inter-linked. The Balance Sheet described the financial position while the Profit and Loss Account supplies much of the explanation of the causes leading to the change in the financial position.

Items to be shown on the Assets side of a Balance Sheet:

·       Fixed Assets:- Fixed assets are those assets that are not meant to be sold but are meant to be utilised in the firm's business. Examples are machinery, patents, buildings and goodwill. Fixed assets can be further classified in to tangible, intangible, wasting and fictitious assets.

·       Investment:— an expenditure incurred on assets to earn interest, dividend, income, rent or other benefit

·       Current Assets:— Those assets which are held:—

v  In the form of cash

v  For their conversion into cash e.g. stock of finished goods, debtors, Bills Receivable, Accrued income.

v  For their consumption in the production of goods or rendering of services e.g. stock of raw materials, WIP.

Item to be shown on the Liabilities side of a Balance Sheet:

The credit balances of those ledger accounts which have not been closed till the preparation of the Trading and Profit and Loss account, are shown on the 'Liabilities side of the Balance Sheet.

(a) Liabilities: - It is the claim of outsiders on the assets of business. Usually the following items are included in liabilities:--

i)                     Long-term liability:-- Those that will be paid after one year.

ii)                    Current Liability: —— Those that must be settled within one year.

(b) Capital: - Capital is the excess of assets over liabilities. It is the claim of owner in total assets of the business. It refers to the amount invested in an enterprise by the proprietor or partners, which is increased by the amount of profit earned and is decreased by the losses incurred and the amount withdrawn whether in the form of cash or kind.

ARRANGEMENT / MARSHALLING OF ASSETS AND LIABILITIES :

The term  ‘Marshalling' refers to the order in which the various assets and liabilities are shown in the Balance Sheet. The assets and liabilities can be shown either in the order of liquidity or in the order of permanency.

Assets: - Assets can be put down in a Balance Sheet, in two ways - either in the order of liquidity or in the order of permanence.

i)                Liquidity: - It means the ease with which the assets may be converted into cash; those assets which are most difficult to convert them in cash are written last.

ii)               Permanence:  Assets that are to be used permanently in the business and are not meant to be sold are written first. Assets that are most liquid such as cash in hand are written last.

The various assets is grouped in the two order will appear as follows:-

Some assets cannot be easily classified. For example, investment can be easily sold but desire may be to keep them. Investment may, therefore, be both liquid and semi-permanent according to the intention of the firm.

Liabilities:- Liabilities can also be grouped in two ways — either in order to urgency of permanent or in reverse order. One way is to first show the capital, then long term liabilities and last of all short term liabilities like amounts due to supplier of goods or bills payable. The other way is to start with short term liabilities and then show long term liabilities and last of all capital.

Floating Assets:—Floating assets are those assets which are meant to be converted in cash at earliest opportunity. Examples are cash, sundry debtors, stock of goods etc. The term floating is derived from the fact that such assets constantly change in value through transactions that are entered into. The figure total debtors for instance changes from day to day. Those assets are also known as circulating assets.

Demo Videos for Accounts (CA/CMA/CS/B.Com/11-12th) by CA/CMA Santosh Kumar Sir: https://www.conceptonlineclasses.com/demovideos

Visit Website: https://www.conceptonlineclasses.com/

#WhatisaBALANCESHEET