Balance Sheet Financial statement
Trading and profit and loss, account shows the net or profit or net loss of the business. But, the net profit or net loss of the business does not represent the financial position of business. Financial position means, the informations regarding the total assets and liabilities of the business.
Every trader is interested to know the amount of total invested capital in the firm. What are the total assets used in the firm, its nature, types and current value in the market? What amounts are to be collected from the debtors? etc. Similarly, he also wants to know the net payable liabilities of the business, payable to its creditors. All such informations are received from balance sheet.
Definition of Balance Sheet
According to Carter, “A balance sheet is a statement drawn up the end of each trading or financial period setting for the various assets and liabilities of the concern as at thisndata.”
According to Bigg. “A balance sheet is a statement which shows in summarized form the capital employed in the business and the various sources from which that capital has been obtained and how it is employed, i.e., the various assets by which it is represented.”
According to Mac Farl nd “A balance sheet is a statement of the assets, liabilities and net worth of an individual or enterprise at a given date.”
On the basis of above definitions it can be said that, balance sheet is a statement prepared on a certain date, containing the total assets on one side and the capital and liabilities on the other side in a set order and proforma.
Characteristics of Balance Sheet
Following are the main characteristics of balance
1.It is a statement containing all assets and liabilities of the firm.
2.It is divided into two parts, in which left hand side is for liabilities and right hand side is for assets. It does not have any debit or credit side.
3.It tells the financial position of the business.
4.It is prepared on a certain date. Generally on the last day of accounting period.
5.No ‘To’ or ‘By’ words are added with the accounts written in balance sheet its book value.
6.Assets and liabilities are shown in balance sheet at recorded.
7.In balance sheet, only real and personal account are
8In balance sheet, assets and liabilities are recorded either in order of permanency or in order of liquidity.
9.It gives information about the total invested capital in the business.
Objects or Advantages or Utility of Balance Sheet
The balance sheet is an important part of final accounts and gives the following important informations :
1. Knowledge of financial position: Balance sheet
helps in knowing whether the financial position of business on a particular date is satisfactory or not.
2. Knowledge of debtors and creditors: At the end of the financial year, how much cash is to be recovered from the debtors and what amount of liabilities are payable to creditors can be known with the help of balance sheet.
3. Knowledge of cash: Balance sheet gives the position of cash at the end of the year. In other words, it tells the cash balance and bank balance of the business.
4. Knowledge of various funds: Every trader create various funds out of profit, to meet the future losses. Thus, balance sheet helps to know the position of these funds kept in the business.
5. Knowledge of assets: On a particular day the existing assets of the business and their values can be known with the help of balance sheet.
6. Knowledge of liabilities: Balance sheet also tells the total liabilities of the business, its nature and order of preference in payment of such liabilities.
7. Knowledge of capital: Balance sheet helps in knowing the position of capital of the business on a particular day.
8. Knowledge of drawings: Balance sheet shows the total amount of drawings made by the proprietor from the business during the particular period.
Procedure of Preparing Balance Sheet
Balance sheet is a summarized statement showing the financial position of the business. Following procedure is adopted on its preparation :
1.Title of balance sheet: Balance sheet is pre-
pared at the end of the year on a certain day. Therefore, the sentence “For the year ended…….20…..” is not recorded with the heading. The title of balance sheet is expressed as below:
2. Sides of balance sheet (B/S): Balance sheet is
divided into two sides having two columns each. In left hand side the first column is to record all liabilities of the business, with its respective values in the second column of amounts.
Similarly, the first column of right hand side is to record all assets of the business with its respective values in the second column of amounts.
3. Items appearing on liability side of balance sheet: The total capital of the business is shown in the liability side of balance sheet by adding the net profit and deducting the net loss from it. Drawings made by the proprietor during thenyear is also deducted from capital to get the existing capital of the firm. Besides it, other liabilities like sundry creditors, bills payable, loans, bank overdrafts, reserves and funds, etc. are also shown in liability side of balance sheet.
4. Items appearing on asset side of balance sheet : Cash in h and cash at bank, bills receivable, investments.Debtors less reserve for bad debts, assets less depreciation on such assets. closing stock, etc. are recorded on asset side of balance sheet.
5. No use of ‘To’ or ‘By’ words: Balance sheet is a
statement and is not an account. Thus, To’ and ‘By’ words are not used with individual accounts.
6. Marshalling In balance sheet, assets and liabili-
ties are recorded in a set order. They are arranged in balance sheet either in the order of permanency or in order of liquidity.
7. Total of both side: After recording all assets and liabilities in anyone of the above discussed order, both the sides of balance sheet are totaled. Here, the total of assets side should be equal to the total of liability side.