Balance Sheet

 

Balance Sheet:

  The Trading Account provides the information regarding the gross profit or gross loss during the Accounting period. Similarly, the profit and loss Account provides the information regarding profit or loss made by a businessman during the Accounting period. But this is not at all that a businessman wants. What he wants is his financial Accounting position on the closing date of the Accounting period.

  He wishes to know whether his capital increase or decreased since the beginning of the period and various Assets and liabilities he has on the closing date of the business period. For obtaining this information he prepares a statement of his assets and liabilities, know as the Balance Sheet. Thus a Balance Sheet is prepared to know the financial position of the business and the capital of the trader on a particular date. The Balance Sheet shows that what a business owns and what is owes to others on a particular date. 

  We can say that Balance sheet is a snap shot of the financial conditions of the business.

 A Balance Sheet is defined as a statement prepared with a view to measure the exact financial position of a business on a certain fixed ae.

 It is also defined as a statement prepared with an aim to know the exact financial position of the business on the last date of the financial year.

 The trial Balance and the adjustments given provides the necessary information for preparing the Balance Sheet. The Nominal Accounts shows in the Trial balance are transferred to the Trading Account or profit and loss Account. The remaining Balances represent either assets or liabilities. These assets and liabilities are shown in the Balance Sheet in a classified form.

  A Balance Sheet has two sides- the left hand side and the right hand side. The left hand side is known as the liabilities side and the right hand side is known as the Assets side, Balance Sheet is only a statement and not an account the words ' Dr ' or ' Cr ' and ' To ' or ' By ' should not be used.

 The various liabilities of the trader are shown on the liabilities side of the Balance Sheet. Similarly the various Assets of the trader are shown on the assets side of Balance Sheet. The excess of assets over liabilities is called as capital and is shown on the liabilities side.

  The net profit is added to opening capital and there from the drawings are deducted. If there is net loss it is to be deducted from the capital. The total value of assets is always equal to the total value of the claims or liabilities. In other words.

   Assets=Liabilities+Capital

                     Or

Capital=Assets-liabilities

   

Since, the Balance Sheet reflecs the true position of the business it must be drawn up very carefully. For this purpose each Asset much be  properly valued and liability must be properly ascertained.

Form of Balance Sheet:

     Assets Accounts show debit Balances, where as liabilities show Credit Balances. All Assets are shown on the Assets side and all liabilities are shown on the liabilities side. It is customary to show the assets and liabilities in a specific order. Arrangement of Assets and liabilities in the Balance Sheet is called Marshalling. There are two methods of arranging the assets and liabilities.

1) The order of liquidity or realisability

2) The order of performance.

Balance Sheet under order of liquidity:-

    Generally sole Trading concerns and partnership films follow the order of liquidity or realisability. The principal followed in this case is that those Assets which can be easily converted into cash come first and the Assets which are more difficult to realise.

Liabilities will be shown in the order in which they are payable, the most pressing liabilities being placed first and follows the less pressing liabilities.