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Balance Sheet Definition - Example, Format, Assets, Liabilities

Balance Sheet Definition

After finding the net profit or net loss of the business, the businessman will want to know what is the financial condition of his business. For this purpose, a statement is prepared in which all the assets and liabilities of the business are written. The statement thus prepared is called a Balance Sheet because it is a table of balances that are opened in ledgers even after all the nominal accounts are transferred to the trading and profit and loss account. The personal and real accounts of the ledger are divided into assets and liabilities and written on the balance sheet. Liabilities are written in the left part of the balance sheet and assets in the right part.

Read Must - Profit & Loss Statement

Balance Sheet
Balance Sheet Definition

Definitions - Various scholars have given the definition of balance sheet as follows

J.R. According to Batlibai, "Balance sheet is a statement that is made to know the financial position of a business on a particular date."


Need and Importance of Preparing a Balance Sheet

The balance sheet serves the following purposes

  • 1. The main purpose of creating a balance sheet is to find out the exact financial position of the business on a given date.
  • 2. It gives knowledge of the nature and cost of all properties. Such as how much is the closing stock, what is the total amount to be received from the debtors, what is the amount of artificial assets, etc.
  • 3. It provides knowledge of the nature and value of liabilities for business.
  • 4. It is learned that how much capital is engaged in business at the end of the year and how much has been increased or decreased in this year.
  • 5. This shows that the business is financially competent or unable. Business is considered to be efficient when assets exceed external liabilities. In contrast, business is considered to be unable or insolvent.
  • 6. Based on the balance sheet, opening entries are made on the first day of the new year.

How To Preparing a Balance Sheet - Drafting a Balance Sheet

Characteristics of Balance Sheet

  1. Balance sheet is a part of closing accounts. This is the reason why all three of the trading accounts, profit and loss accounts and balance sheets are called as the final accounts collected. But the balance sheet is a statement 'No account. It has no debit and credit side and hence the words "To" and "By" should not be used in it.
  2. The balance sheet is a summary of individual and real accounts that are currently opened and not closed by transfer to a trading and profit and loss account. The debit balances of personal and real accounts are written on the right side which is called Assets Side and the credit balance is written on the left side which is called Liabilities Side.
  3. The sum of its two sides ie assets and liabilities is always equal. If the sum is not equal then it is assumed that there is some inaccuracy in making the balance sheet.
  4. It is made on a particular date and not for a period. The status statement is true only for the date on which it is created, since a transaction after that date can also change the status statement.
  5. It reveals the financial status of the business as per the ongoing business concept.

Grouping And Marshalling Assets And Liabilities In The Balance Sheet:

Assets and liabilities are grouped and written in a particular order in the balance sheet. The word Grouping means writing items of a similar nature under the same title. For example, the amount due from various customers will be written under the title Sundry Debtors. Likewise all Current Assets such as cash, bank balances, debtors, stocks etc. will be written under a different heading.

Marshalling means to write the assets and liabilities in a particular order. One of the following two sequences is used to sort assets and liabilities in the balance sheet.

In the Order of Liquidity - In this method, the sooner the asset can be converted into cash, the earlier the asset is written, such as cash balance. Assets that can be sold as late as possible are written later. The lowest liquid assets are written at the end, such as Goodwill. Similarly, in the liabilities side, those liabilities are written first. In other words, current liabilities are written at the top, followed by fixed or long-term liabilities and finally the owner's capital. Often sole traders and partnership institutions prepare their business balance sheets in the order of liquidity. The format of the balance sheet will be as follows by liquidity order

Note 1. The words 'As at' are used in the title of the balance sheet as it is true only on a certain date. After this one day the financial position of the Institution/Company may be different.

2. The sum of the two sides of the balance sheet is always equal.

3. Prepaid expenses are written in the title Current Property. Although they will get cash from them, but we will get their benefits soon.

It is very important to know the classification of assets and liabilities before the creation of the balance sheet.

Classification Of Assets

Assets can be classified according to their nature in the following ways:

(1) Fixed Assets - Assets that are purchased once and taken advantage of for many years are called fixed assets such as land and buildings, plantations and machinery, motor vehicles, furniture, etc. According to Finney and Miller, "Assets that are purchased for use in business operations and not for re-sale are called fixed assets.

Because the purpose of keeping these assets is not to sell them but to use them, so no consideration is taken in the changes in their market value and they are written in the balance sheet by deducting depreciation from the cost price.

(2) Curent Assets - Assets that a trader buys for the purpose of making a profit by reselling them are called current assets. The businessman wants to convert them into cash as soon as possible. Therefore, there is a change in them. According to Howid and Upton, "In general, current assets are those assets that are converted into cash under a normal (usually one year) process by the normal process of business. Examples of current assets are - cash, receivable bills, short-term. Appropriation, debtors, prepaid expenses, closing stock, etc. While evaluating these assets, it should be kept in mind that the closing stock is valued at the realizable value and the cost price, and a reasonable amount is deducted for the bad debt provisions when evaluating the debtors. .

(3) Liquid Assets - Assets which are in cash or can be converted into cash in a quick manner are called liquid assets such as cash, receivable bills, short-term appropriations, debtors, accrued income etc. In other words, if the closing stock and prepaid expenses are omitted from the current assets, the remaining assets are called liquid assets.

(4) Eictitious or Nominal Assets - These are those assets which cannot be converted into cash nor can any future gain from these assets such as profit and loss. The debit balance of the account and not yet written expenses such as advertising expenses etc. These assets are not really assets, but they are gradually transferred to the profit and loss account every year. And until they are completely transferred to the profit and loss account, their balance is shown in the assets side.

(5) Wasting Assets - These are the assets that are consumed or lost over time, such as mines and oil wells. These include patents and properties taken on / for a particular year.

(6) Tangible and Intangible Assets - Tangible assets are those assets which have physical existence and can be seen and experienced such as plant and machinery, buildings, furniture, livelihoods, cash etc. Intangible assets are those assets which have no physical existence and cannot be seen and experienced such as Goodwill, Trade Marks, Patents etc. Intangible assets are also valuable assets like tangible assets as they also help the firm to make profit. For example, fame is helpful in attracting customers and patent is actually the technology that helps in the production of goods.

Classification Of Liabilities

Liabilities can be divided according to their nature in the following ways:

(1) Fixed or long-term liabilities - These are liabilities that are to be paid after a period of one year or more. Such as Public Deposits, Long Term Loans and Debentures etc.

(2) Current or short-term liabilities - These are liabilities which are usually to be paid within one year such as bank overdrafts, creditors, bills payable, unpaid expenses etc.

(3) Contingent liabilities - These are the liabilities that have to be paid only when a particular event occurs, otherwise not. Such as: Ability to weave the receivable bills from the bank - If the bill acceptor dishonors the bill on the due date, then we will be liable to the bank for the amount of the bill.

(II) Litigation against us in court - Liability will arise if they are defeated.

(II) Guarantee of loan - If the firm has given bail to another person, then the firm will be liable if the person does not fulfill his / her liabilities.

Potential liabilities are not included in the balance sheet. These are written outside the balance sheet as information only.

How To Create Final Account 

Things to keep in mind while Creating Final Accounts

(1) If a trial has not been made in question, then if the trial is prepared first, it makes it easier to create final accounts. If there is any difference in the trial account, then it is written in the balance sheet by writing it in Suspense Ac.

(2) Accounts written in a treasury account are written only once in a trading or profit-and-loss account or in the balance sheet, while adjustments are double-checked.

(3) The items on the debit side of the treasury account are written either on the debit side of the trading account or on the debit side of the profit-loss account or on the asset side of the balance sheet.

(4) The items on the credit side of the treasury account are written either on the credit side of the trading account or on the credit side of the profit-loss account or in the capabilities side of the balance sheet.

(5) It should be noted that all the accounts related to the goods like purchase, sale, return and sale return are written in the trading account and the expenses related to buying and making the goods are also written in the trading account. . All other expenses and other nominal accounts are written into profit and loss account.

(6) All personal accounts and real accounts are always written in the balance sheet.

(7) Rent and electricity expenditure (lighting) will be written in the trading account only if clearly given by the factory, otherwise these will be written in the profit and loss account, assuming office expenses. For example, if 'Factory Rent' is given in the question, then it will be linked to the trading account and if 'Rent' is given only then it will be written in the Profit and Loss account.

(8) If the trial in question is not made up and it is not clear whether a particular account is income or expenditure, then that account will be treated as expenditure like Discount, Commission, Brokerage. Rent, etc.

(9) The assets and liabilities of the balance sheet should always be equal.

Balance Sheet Format

Balance Sheet
as at............

Liabilities

Current Liabilities

Bank Overdraft
Bills Payable
Sundry Creditors
Outstanding Expenses
Unearned Income

Fixed Liabilities

Loan Term Loans

Reserves

Capital

Add: Net Profit
Less: Drawings
Less: Income Tax
Less: Life Insurance Premium

Assets

Current Assets

Cash In Hand
Cash At Bank
Bills Receivable
Short Term Investments
Sundry Debtors
Closing Stock
Prepaid Expenses
Accrued Income

Fixed Assets

Furniture
Loose Tools
Motor Vehicle
Long Term Investments
Plant and Machinery
Land And Buildings
Patents
Goodwill
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