Meaning of Balance Sheet:
Balance sheet is also known as position statement. Balance sheet is a statement of assets and liabilities presented on a given date usually at the end of accounting period to show the financial position of a firm. It obtains assets on one side, and shareholder's equity and liabilities on the other side. It is prepared either in the horizontal or in the vertical form.
Balance sheet is the last step of final account. It is prepared after the preparation of profit and loss appropriation account. It is a statement not an account; therefore, it has assets and liabilities sides instead of debit and credit sides. Balance sheet is a summary of the personal account and real account having debit and credit balances. It does not include the accounts which do not have any balance or have been closed by transferring to trading, profit and loss and profit and loss appropriation account.
Importance and objectives of balance sheet
Importance or Objectives of Balance Sheet
The following are the importance/ objectives of balance sheet:
1. It shows the financial position of a company off balance sheet.
2. It provides the information about share capital, reserve and surplus, liabilities and assets.
3. It helps to borrowing loan from outside easily.
4. It provides the detail information about value and types of assets used.
5. It is very useful for business planning and control.
Items that appear in the capital and liabilities side of balance sheet
1. Share capital: the capital employed by a company for its business operation is knows as share capital. It is the total amount of capital collection from its shareholders for achieving the common goal of the company as stated in memorandum of association. Share capital of a company can be divided into authorized, issued, subscribed, called up and paid up capital. However, the actual capital that the company employs each the paid up capital.
2. Reserve and surplus: reserve and surplus are he amount set a site from profit meet future requirement and contingencies. For example, general reserve, specific reserve etc.
3. Second loans: the loan that is is taken without any mortgagee is called secured loan. For example bank loan.
4. Unsecured loan: the loan that is taken without and mortgage is called unsecured loan.
5. Current liabilities and provision: the liabilities which are to be discharged within a short period of time that is normally within a year are called current liabilities. For example, sundry creditors, bills payable etc.
Provision: is the amount set a site from the profit to meet any losses or liabilities likely to arise in future. For example, provision for doubtful debt, provision for tax etc.
Items that appear on the assets side of balance sheet
1. Fixed assets: the assets which are acquired to use them for a long of time are called fixed assets. For example, plant and machinery, land and building etc.
2. Investment: Investments are the stock shares, bonds and other securities which are held by the company to earn income or exercise influence over other companies.
3. Current assets, loans and advances: the assets which are normally converted into cash within one year are called current assets. For example, cash, sundry debtors etc.
Loans: refer to the payment before getting good or services. For example, prepaid rent, loan to staff.
Advance: refer to the payment before getting goods or services. For example, prepaid rent advance tax etc.
4. Miscellaneous expenditure: they refer to the expenditures which are made for a long period of time. Such expenditures are written of within a certain period of time. For example, preliminary expenses, discount or loss or loss on issue of shares and debentures etc.
5. Profit and loss appropriation account (debit balance): it is the balance of profit and loss appropriation account.
Marshalling of Assets and Liabilities in the Balance Sheet
The assets and liabilities should be arranged in balance sheet in some specific order. The assets and liabilities may be arranged in any of the following two orders:
1. In order of permanency
2. In order of liquidity
Share capital
Share premium
Reserve and surplus
Debenture
Loan-term loan
Sundry debtor
Outstanding expenses
Bills payable
Bank overdraft
Goodwill
Land and building
Plant and machinery
Furniture and fixture
Prepaid expenses
Stock
Account receivable
Cash in hand bank
Sundry creditors
Bills payable
Outstanding expenses
Bank overdraft
Long term-loan
Debentures
Share premium
Reserve and surplus
Share capital
Cash and hand
Cash at bank
Bills receivable
Debtors
Stock
Furniture and fixture.
Plant and machinery
Land and building
Good will
1. In the order of permanency
According to this basis, assets are listening in order of their permanency. First of all the most permanent assets such as goodwill, patent; trademark etc are mentioned following by other assets. The most liquid assets such as cash nin hand is mentioned at last. Similarly, on the liability side. The most permanent liability i.e. share capital which is to be paid last is shown as first items followed by fixed and long-term liabilities and lastly, the current liabilities which are to be paid first.
2. In the order of liquidity
Accounting to this basis, assets are arranged in order of the case with which they can be converted into cash therefore, the cash in hand will come first the cash at bank following by other assets and land and building at the button of the list. In regard to the liabilities, they are so arranged in the order they are to be discharged by loans like outstanding expenses. Therefore, reserve and surplus and capital will appear at the bottom.