9.

BALANCE SHEET
Introduction and meaning: Balance Sheet means a statement of Assets and liabilities of the business as on the last day of the
accounting year. Balance Sheet thus, shows the financial position of the business. i.e. what it
owns and what it owes.
Balance Sheet is a statement containing all the balances that remain in the ledger accounts after
preparation of the profit and loss account. Thus from the above statement it can be said that
Balance Sheet is a statement of Assets and liabilities which helps to ascertain the financial
position of a concern on a particular date i.e. on a date financial statement or final accounts are
prepared or books of accounts are closed. In fact it treats the balances of all those ledger
accounts, which have not yet been squared up. These accounts relate to Assets owned, expenses
due but not paid, incomes accrued but not received or certain receipts which are not due or
accrued.
A Balance Sheet is a statement prepared to reflect the true and correct financial position of a
business on a certain date. It is a statement that measures the solvency of the organization. The
main object of a Balance Sheet is to show how proprietors capital stands invested in his business.
It reveals the position of owned capital and borrowed funds and the manner in which they are
invested in business. At the end of year, all Assets and labializes accounts are arranged properly
and a Balance Sheet is drawn to show Assets owned by the trader and also the liabilities owned
by him.
The Balance Sheet is a statement and not ledger accounts. Hence, it is two sides are not known as
the debit side and credit side. Instead they are termed as Assets side and Liabilities side. The
left hand side called Liabilities side and right hand side is called Assets side. Balance Sheet
contains the balances of real and personal accounts which are carried forward to the next
accounting period. It should be noted that nominal accounts (income, expenses, losses and gains)
are closed every year by transferred to profit and loss accounts. Every year such accounts are
maintaining a fresh. It is only a real and personal account that is carried forward each year.
Balance Sheet is prepared from the balances of real and personal accounts only.
Preparation of Balance Sheet: It is clear that a Balance Sheet is not a ledger account but is merely a statement of ledger
balances which are left open in the ledger or in the trial balances after the preparation of Trading
and Profit and Loss Account. The Balance Sheet does not have Debit side and Credit side as
in a ledger account or the words To and by is prefixed to the Assets and liabilities respectively.
The debit balances of real and personal account are taken to the Assets sides of the Balance Sheet
while credit balances of such accounts are taken to the liabilities side. No closing entries are

required to be passed for transferring the real and personal account in the Balance Sheet. The
balances of these accounts are carried forward and shown in the ledger of the following year as
opening balances. However, the debit balance of drawing account is transferred to the debit of
capital account and thus only drawing account may get closed. With all the balances shown in
the Balance Sheet, the total of the two sides of a Balance Sheet must always agree.
Arrangement of Assets and Liabilities:The asset and liabilities should be shown in the Balance Sheet in a particular order. Joint stock
companies, banking companies, etc. have to show their asset and liabilities in a particular order
as per requirement of law but a sold trader is free to present them in any order he chooses.
However, there are two possible methods in which Assets and liabilities can be presented in the
Balance Sheet. These are as follows:a) Order of Preference or Priority:In this case, fixed asset and fixed liabilities are shown first followed by current
Assets and liabilities. On the Assets side the order will be as under- Goodwill, land and
building, plant and machinery, furniture and fixtures, motor cars, shares, closing stock,
sundry debtors, bills receivable, investment, cash at bank, cash in hand and prepaid
expenses. On the liabilities side the order will be as under: Capital, loans, creditor, bills
payable, bank overdraft and outstanding expenses.
b) Order of Liquidity:In this case, Assets are arranged in the order of liquidity i.e. the order in which
they can be cover into cash and the liabilities in the order in which they are to be paid off.
On the Assets side, the order will be as under: Cash in hand, cash at bank, investment,
bills receivable, sundry debtors, closing stock, furniture and fixtures, plant and
machinery, land and building and goodwill. On the liabilities side, the order will be as
under: Bills payable, sundry creditors, outstanding expenses, loans, bank overdraft and
capital.
Classification of Assets :Assets have been classified into:1) Fixed Assets.
2) Current Assets
3) Fictions Assets
.1) Fixed Assets:Assets or properties of more or less permanent nature are called fixed Assets.
They are not meant for resale but they facilitate smooth conduct of business. Thus, land,
building, plant, machinery, furniture, fixtures, fittings, office equipment, loose toolset. are
fixed Assets.
2) Current Assets:This are held temporarily in business and are meant for conversion into cash.
They are also known as Circulating Assets or Floating Assets as their form goes on

changing from time to time. Thus, cash may be use to buy goods or raw materials which
may be converted into finished goods which may be sold to customer from whom cash is
finally recovered. In this way, cash balance changes into raw materials, which are
converted into finished products, which is covered partly into cash(sales) and partly into
debtors, and finally the amount due from debtors is received in cash. However, the final
cash collected is more than the initial cash due to an element of profit. In the event of
losses it will get reduced in the process. e. g. current Assets are cash and bank balances,
closing stock, sundry debtors, etc.
Fixed Assets are shown in the Balance Sheet at cost less depreciation return off
till the date of Balance Sheet. Current Assets are shown at cost or market value whichever
is less. However, this rule generally applies to the stock of goods on hand.3)
Fictions Assets:Those Assets which are not representing by anything concrete are called
fictitious Assets. There is no tangible property to support them. These Assets generally
represent huge expenditure which cannot be fully charged to any one year Profit and loss
account. They are shown on the Assets side of the Balance Sheet and return off over a
long period. Each year, the extent to which they are not return off, they are shown in the
Balance Sheet. For example of fictitious Assets are preliminary expenses, deferred
revenue expenditure on advertising, etc
Classification of Liabilities :The liabilities may be broadly classified as follows1) Fixed liabilities.
2) Current liabilities.
3) Contingent liabilities.
1) Fixed liabilities:These are the liabilities to be paid off after a long period of time. It is a long term
liability which does not become due within a relatively short period, usually, a year. e.g.
Long term loans, moorages, debentures. In case, where capital is treated as a liability,
then it can also be regarded as fixed liabilities.
2) Current liabilities:These liabilities are short term debts which are usually paid off of within a year or
less. It includes any liability accrued and be paid out of current assented: trade, creditors,
bank overdraft, bills payable, outstanding expenses, etc.
3) Contingent liabilities:These are not the actual liabilities and become the real liabilities depending upon
the happening of some uncertain future events. In other words, contingent liabilities
become actual liabilities provided the contemplated events takes place. In case, the event
do not take place no liability occurs. e.g- pending suits against traders in the court of law,
bills discounted with bank, workers disputes relating to demand for higher wages and
bonus etc.
Form and Layout :-

The Balance Sheet is generally prepared in T form having two sides, one to show the
Assets and the other liabilities. The left hand side is generally called as the liabilities side and the
right hand side is called the asset side. This is called the traditional form. Now-a-days, the
Balance Sheet is also prepared in the vertical or T form in a way a layman can understand.
Liabilities Rs. Rs. Assets Rs. Rs. a) Fixed Liabilities. a) Fixed Assets. b) Current Liabilities. b)
Current Assets. c) Contingent Liabilities. c) Fictitious Assets.
PROFIT AND LOSS ACCOUNT
Profit and Loss account shows closing balances of all nominal accounts relating to the
remaining income and expenses. Debit side of the profit & loss account shows expenses like
administrative expenses, selling expenses, financial expenses, depreciation and other unusual
expenses and losses. Whereas credit side of the Profit and Loss Account shows other business
income and gains. The balance of the profit and loss account shows the result of business
operations during the year. The net profit or net loss shown by the Profit and Loss account is
transferred to the capital account of proprietor. Hence, it is a part of financial statement, which
shows the result of business operations conducted during the year
Purpose:The purpose of Profit and Loss account is to find out net profit earned or net loss incurred during
the year.
Contents :- The Profit and Loss Account contains all indirect expenses and losses other than
those shown on debit side of Trading Account are shown on debit side of Profit and Loss
account. Whereas, all indirect resource incomes and gains other than those shown on credit side
of Trading Account are shown on credit side of Profit and Loss account.
Classification of Expenses:a) Administrative expenses:Administrative expenses are the expenses incurred to plan, organize, administer
and control the business.
e. g. Salaries to office staff, Rent, rates, insurance, lighting of office, Printing,
telephones, telex, postage, Depreciation and repairs of office equipments, building,
furniture, vehicles, Legal charges, audit charges, bank charges, etc.
b) Selling and distribution expenses:Selling expenses are the expenses incurred to create and increase demand for goods.
Distribution expenses are the expenses incurred from the time the goods sold leave the traders
premises till the goods reach the customers.

e. g. Packing materials, Salaries of sales and distribution staff, Travelling, conveyance,

Commission or discount on sales, Advertisement or showroom expenses, Warehouse or sales
office rent, rates, insurance, lighting, Freight outward, carriage outward, expenses on exports,
Depreciation and repairs of delivery van, vehicles, etc.
c) Finance charges and others:Finance expenses are the expenses incurred to obtain loans, bank charges, discount to
debtors, interest paid on loans.
Form/ Layout/ Format:Profit & loss A/c for the year ended___________ Date
Particulars Rs. Rs. Date Particulars Rs. Rs