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Balance Sheet
Balance sheet is a statement of
financial position of a concern at a given date. It shows the financial position
of a concern at a given date of accounting period, because the situation may be
entirely different on the following day and indeed, might have been quite
different a day earlier.
A balance sheet may, therefore, be
defined as "a statement prepared with a view to measure the exact financial
position of a business on a certain date.
"It is prepared from the trial
balance after all the balances of nominal accounts are transferred to trading
and profit and loss account and corresponding accounts in the ledger are closed.
The balances now left in the trial balance are either personal or real accounts.
In other words, they either represent assets or liabilities existing on the date
of closing of accounts.
All these assets and liabilities
are displayed in the balance sheet according to certain principles such as :
(a) All real and personal account
having debit balances should be shown on the assets side of balance sheet which
is on the right-hand side.
(b) All the real and personal
account having credit balances should be shown on the liabilities side of
balance sheet, which is on the left-hand side. The excess of assets over
liabilities represents the capital of the owner. This figure of capital must
tally with the closing balance of capital account in the ledger after the net
profit or loss has been transferred therein.
It shows that when real and
personal accounts are placed on the opposite sides of balance sheet according to
the nature of balances, the assets side should be equal to liabilities side.
As stated earlier and personal
accounts having debit balances are called assets; actually at trader's property
and possessions as also the debts owing to him (sundry debtors and bills
receivable) are assets.
The real and personal accounts
having credit balances along with owner's capital are shown as liabilities. So
liabilities are the debts owing by a business to third parties and the owner of
the business.
Classification of Assets
Assets have been classified as
follows:
(a) Fixed Assets. The assets of a
durable nature which are used in business and are acquired and intended to be
retained permanently for the purpose of carrying on the business, such as land,
building, machinery and furniture etc. They are also sometimes called as capital
assets or fixed capital expenditures or long lived assets. Fixed assets are
collectively known as 'Block'.
(b) Floating or Circulation Asset.
Those temporarily held assets which are meant for resale or which frequently
undergo change e.g. cash, stock, stores, debtors and bills receivable. Floating
assets are again sub-divided into two parts, liquid assets and non-liquid
assets. Liquid assets are those which can be readily converted into cash without
appreciable loss. Cash in hand and cash at bank are the example of such assets.
Other assets which cannot be readily converted into cash, or not without
appreciable loss, are called non-liquid assets e.g., stock, stores.
(c) Fictitious Assets. Those assets
which are not represented by anything concrete or tangible. Preliminary
expenses, debit balance of profit and loss account are the examples of such
assets. These are also called as 'nominal' or 'imaginary' assets.
Classification of Liabilities
The liabilities of a concern can be
classified as given below:
Fixed Liabilities. Those
liabilities which are to be redeemed after a long period of time. This includes
long term loans.
(b) Current Liabilities. Those
liabilities which are to be redeemed in near future usually within a year. Trade
creditors, bank loan, bills payable etc., are examples of current liabilities.
(c) Contingent Liabilities. These
are not actual liabilities but their becoming actual liability is contingent on
the happening of a certain event. In other words, they would become liabilities
in the future provided the contemplated event occurs. If it does not occur, no
liability is incurred. Since such a liability is not an actual liability, it is
not shown in the balance sheet. Usually, it is mentioned in the form of a
footnote.
Form of Balance Sheet
A balance sheet has two sides-the
left-hand side and the right-hand side. These two sides, however, are not
comparable with the debit side and credit side of a ledger account because
balance sheet is not an account. Words 'To' or 'By' are not used in the balance
sheet The left-hand side is liabilities side and contains credit balances of all
real and personal accounts and on the right-hand side which is "assets" side,
are listed the debit balances of real and personal accounts.
Arrangement of Assets and
Liabilities in Balance sheet 0
The assets and liabilities should
be arranged in balance sheet in some specific order. Arrangement of assets and
liabilities in the balance sheet is called 'Marshalling of assets and
liabilities'. There are two systems of arrangement of assets and liabilities in
the balance sheet:
(a) Order of Liquidity.
(b) Order of Permanence.
In liquidity order most easily
realizable assets are shown first and are followed by assets which are less
easily resalable. So, the assets most difficult of realization will be shown
last. In case of liabilities, these will be shown in the order in which they are
payable the most pressing liability being placed first.
Distinction between Trial Balance and Balance Sheet
1. Trial balance is the 'means' of
accounting process of which the balance sheet is the 'end' because a balance
sheet is always prepared from the figures taken out of trial balance.
2. The purpose of preparing a trial
balance is to check the arithmetical accuracy of account books; but balance
sheet is drafted to reveal the financial position of the business.
3. The two sides of balance sheet
are called 'liabilities' and 'assets' sides respectively but incase of -trial
balance the columns are 'debit' and 'credit' columns.
4. For completing the accounting
cycle, the preparation of balance sheet is. necessary; but the preparation of
trial balance is not always necessary. -
5. The period after which a balance
sheet is prepared, is normally one year but trial balance is prepared very often
and it may be monthly, quarterly or half-yearly.
6. Trial balance contains in it all
the three types of accounts viz. personal real and nominal, but balance sheet
contains only personal and real accounts.~
7. Generally, trial balance does
not contain closing stock but balance sheet does.
8. It is not possible to know the
accrued, advance, outstanding and prepaid receipts and expenses from trial
balance, but balance sheet discloses such items.
Manufacturing Account
Some concerns like to ascertain the
cost of goods manufactured by them during the year distinctly before they
prepare the trading account and ascertain the gross profit. This account is
called the manufacturing account and is prepared in addition to the trading
account. It has the under mentioned characteristics:
(i) Since the purpose of
preparation of this account is to ascertain the cost of goods produced during
the year, the opening and closing stocks of finished goods are not entered in it
; they will figure in trading account.
(ii) In respect of materials it is
the figure of materials consumed which is debited to the account. This figure is
obtained by adjusting the purchase of materials for the opening and closing
stocks of materials e.g., Opening stock of raw materials Add: purchases of raw
materials during the year Less: closing stock of raw materials Cost of materials
consumed
(iii) In the manufacturing concern
there will always be some unfinished goods or work-in-progress. The cost of
work-in-progress at the end of the year is credited to this account, shown in
the balance sheet and debited to the manufacturing account of next year as on
opening balance.
(iv) All expenses in factory-
wages, power and fuel, repairs and maintenance, factory salaries factory rent
and rates are debited to this account. Depreciation on machinery is also
.debited to this account and not to the profit and loss account as is usually
done.
(v) Amounts raised by sale of waste
or scrap materials are deducted from raw material purchases.
(vi) Now the difference is two
sides of this account will be the cost of goods manufactured during the year.
This cost will be credited to manufacturing account and debited to trading
account.
The trading account will now
comprise only the opening and closing stock of finished goods, the cost of goods
manufactured as transferred from manufacturing account and sales of finished
goods. The gross profit will be transferred to profit & loss account. The
profit and loss account and the balance sheet will be prepared as already
explained.
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