The financial statement prepared at the end day of accounting period to show financial position of a business concern is called balance sheet.
In other words,
Balance sheet is a statement of assets and liabilities including owner’s equity at a particular date of a business concern. Its main task is to exhibit the financial position of a business concern at a particular date.
The statement of “assets” and “liabilities” exhibits the financial position of a business. Balance sheet is prepared with those ledger balances that are left after transferring revenue ledger balances into income statement.
Balance sheet is not an account. It is a financial statement which is prepared with ledger balances. Ledger balances are not transferred to balance sheet.
These ledger balances remain as closing balances which are transferred to next accounting period as opening ledger balances. Balance sheet includes assets and liabilities & owner’s equity. Total of assets is equal to total of liabilities and owner’s equity.
So Assets = Liabilities + Owner’s Equity. In brief A= L + OE.
Objective of Balance Sheet
Balance sheet is prepared with the following objects:
- Knowing financial position of a business.
- Knowing real value of assets.
- Knowing amount and nature of liabilities.
- Verification of debt paying capability of a business.
- Knowing trend of changes of assets and liabilities.
- Knowing trend of profit or loss of a business.
- Knowing deduction of depreciation from assets.
- Knowing the amount of prepaid and unpaid expenses.
Classification of Balance Sheet
Presentation form of balance sheet is of two types:
1. Unclassified Balance Sheet
In unclassified balance sheet all assets are shown without making any classification. In the similar way, liabilities are also shown without making any classification.
But in writing, assets liquidity and durability of assets are taken into consideration as far as possible. Similarly liabilities are written considering their short term and long term nature.
That is, if assets are written giving emphasis on liquidity, the long term liabilities follow short term liabilities.
2. Classified Balance Sheet
In statement form balance sheet assets are shown at first. Assets are shown classifying them into:
(a) Current assets,
(c) Property, plant and equipments,
(d) Intangible assets.
In the later part liabilities are shown classifying them into current liabilities, long term liabilities and owner’s equity.
If assets, liabilities and owner’s equity are written accurately it is evident that the total of assets must be equal to total of liabilities and owner’s equity.
Thereby the equation A= L + OE is proved.
The balance sheet in which assets are shown classifying them into current and fixed-and liabilities as short term and long term and owner’s equity separately is called classified balance sheet.
In below we discuss about the components of classified balance sheet.
Cash or other assets which are convertible into money and exhausted within a short period of time, one year or less from the date of balance sheet are called current assets.
A service oriented business concern generally has four types of current assets:
(2) Investment (short term),
(3) Accounts receivable and notes receivable,
(4) Prepaid expenses and accrued income but not received.
- Cash: Cash means cash in hand and cash at bank which are used for current operating purposes; such as deposits into saving account and current account. Cash as current asset is shown as a first item in the balance sheet.Cash equivalent: Cash equivalents are those assets which are readily convertible into money. Such as, treasury bills, short term notes maturing within 90 days, deposit certificates etc.
- Investment (Short term): Generally marketable securities’ are called short term investment. For example, shares and bonds of other companies purchased for a short term period.
- Accounts receivable and notes receivable: Accounts receivable means money receivable from persons or organizations. Accounts receivable are created when services are rendered or goods are sold on account. For these debts no documentary evidence is kept excepting signature on invoice or ticket.
- Notes receivable: Accounts receivable are created when services are rendered or goods are sold on account. This account receivable is called debtor.Debtor prepares a promissory note and signs on it and hands it over to the creditor as a documentary evidence of his debts. A promissory note is a promise to pay a certain sum of money within the stipulated time. This note is generally prepared for a short period of time. After the expiry of the stipulated time money is received.
- Prepaid expense and accrued income: The, prepaid expense and accrued income not received within the particular accounting period are termed as current assets. Generally house rent, insurance premium, office supply etc. are paid in advance. Interest on investment accrued but not received on the date of maturity is shown as current assets at the end of accounting period.
- Merchandise inventory: In trading concern merchandise inventory is also treated as current assets. It means merchandise remains unsold at the end day of an accounting period.
Fixed or long-term assets
The assets which are used in a business for a long term period are called fixed or long term assets.
Property, plant, equipment, long term investment and intangible assets. A business organization enjoys utility of fixed assets for more than year.
- Property, plant and equipment: Land, building, plant and equipment last for more than a year in a business.A business concern purchases these assets for use in the business, not for sale.
Property, plant and equipment are synonymous of plant assets or fixed assets.
In balance sheet, under fixed assets property is shown first, then plant and then equipment.
- Land: Land is a space of a business concern where office building, factory building and store-building are built and business activities are carried out thereon.
- Building: Buildings are the structures of a business concern where its activities are carried out. Building of a business concern is the plant asset.
- Plant and machinery: Manufacturing concern uses heavy plant and machinery for production purpose. These are the fixed assets of the business. Business concern enjoys utility of these plant and machinery for a longer period.
- Equipment: Equipment means table, chair, cabinet, computer, copier, calculator, fax machine, telephone, computer etc. used in offices and stores of the business.
- Long term Investment: Long term investment generally means stocks and bonds of other companies purchased. These are purchased (i) to hold control over other companies, (ii) for permanent income and (iii) for maintaining good relationship with other companies.
- Intangible assets: The assets which are ir visible and untouchable are called intangible assets of a business, such as, goodwill, trade mark, copyright, preliminary expenses, share discount, brand name etc.
Liabilities payable within a short period of time or quickly changeable are called current liabilities.
The liabilities which are payable within the next year from the date of balance sheet or within an operating cycle whichever is longer are called current liabilities.
Accounts payable, notes payable, expense payable, dividend payable, unearned revenue, bank loan, interest payable etc.
The liabilities which are payable after one year from the date of balance sheet or after an operating cycle whichever is longer are called long term liabilities.
Such as mortgage loan, debenture, long term notes payable, lease, pension and gratuity fund etc.
Owner’s equity differs as per the nature of business
In sole-tradership business, a single capital account is maintained. In partnership business separate capital accounts are maintained for individual partners.
In case of joint-stock company owner’s equity is divided into share capital and retained earnings. Share capital and retained earning joined together are called shareholder’s equity.