Financial Statements – I Part 1

Download PDF of This Page (Size: 229K)

Balance Sheet:

  • Balance Sheet is a Financial Statement prepared by every business enterprise to know the financial position of it on a particular date.

  • It shows assets owned by the business enterprise and liabilities owed by it on a particular date.

  • It shows the amount of claims against the resources of business firm.

    Resources of the business concern are – Fixed assets and Current assets.

    Claims include – claims by owners i.e. shareholders, and claims by outsiders such as creditors, bankers etc.

  • It has two sides, one is Assets side and another one is Liabilities and Capital side.

    Note: Balance Sheet is not an account.

Classification of Assets and Liabilities:

Assets can be classified based on different features.

Image of classification of assets and liabilities

Image of Classification of Assets and Liabilities

Image of classification of assets and liabilities

Classification as Per Time Period:

  • Fixed Assets – These are purchased for long term use. Ex: Buildings, Machinery, Transport Vehicles etc. These assets are not for resale.

  • Current Assets – They can be converted into cash or liquidity easily. Current Assets include Cash in hand, Cash at bank, Bills receivables, Debtors and Stock or inventory.

Classification as Per Tangibility:

  • Tangible Assets – Assets that can be touched, seen and occupies space.

    Ex: Machinery, Buildings, Vehicles etc.

  • Intangible Assets – Assets which cannot be seen or touched. They are perishable in nature.

    Ex: Patents, Trademarks, Goodwill or reputation etc.

Other Classification:

  • Liquid Assets – Assets which or in cash or can be converted easily into cash.

    Ex: Stock, Marketable Securities etc.

  • Fictitious Assets – These are not real assets. They are shown as assets for time being but they are expenses and losses which for some reason not recorded on their incidence.

    Ex: Preliminary Expenses, Discount Allowed on issue of shares etc.

  • Declining Assets – Over a period of time these assets will exhaust. Ex: Mines and quarries etc.

Liabilities Can Be Classified As

  • Long term Liabilities – The liabilities owed by business concern, which are not paid during the current accounting period. These are paid over a number of years.

    Ex: Loans from financial institutions on long term basis (for more than 5 years).

  • Current Liabilities – The liabilities which are paid during the current accounting period.

    Ex: Bank overdrafts, Trade Creditors, Bills payables etc.

  • Owner’s funds (Capital) – As per business entity concept, owner’s (proprietors or shareholders) funds are liability to the business enterprise. It includes undistributed profits and reserves.

Need of Balance Sheet:

  • To know the true financial position of the business entity on a particular date.

  • It is a systematic representation of Assets and Liabilities of the business entity.

  • It provides information regarding business position, to the investors (shareholders), finance providers such banks, financial institutions, government, employees and public at large.

Balance Sheet Format:

Balance Sheet can be prepared in two ways based on Liquidity order and Permanency order.

Liquidity Order:

  • Assets and Liabilities are written in order of their liquidity, highest liquidity assets or liabilities first.

  • Liabilities are written on left side and Assets are written on right side of Balance sheet.

  • Short term liabilities first and long term liabilities next, lastly capital.

Permanency Order:

  • Liabilities on left side and Assets on right side of the Balance Sheet.

  • Long term Assets are written first and then short term assets on Assets side.

  • Capital is written first and then long term liabilities followed by short term liabilities on Liabilities side.

  • This format is mostly used in accounting.

Format of Balance Sheet for Liquidity order:

Balance Sheet of M/s ……….. As on …………..

Table of Format of Balance Sheet for Liquidity Order: Balance Sheet of M/S ……….. As On
Title: table of Format of Balance Sheet for Liquidity order: Balance Sheet of M/s ……….. As on

Liabilities

Amount (Rs.)

Assets

Amount (Rs.)

Bank Overdraft

Outstanding expenses

Bills payables

Sundry creditors

Loans

Capital

Add Net Profit

Less Drawings

××××

××××

××××

××××

××××

××××

××××

××××

Cash in hand

Cash at bank

Prepaid expenses

Investments (s/t)

Bills Receivables

Sundry Debtors

Closing Stock

Investments

Furniture

Plant & Machinery

Land & Building

Good Will

××××

××××

××××

××××

××××

××××

××××

××××

××××

××××

××××

××××

××××

××××