Accountancy · Ch 9 — Financial Statements - I
Preparing Balance Sheet
Preparing Balance Sheet
The Balance Sheet: A Snapshot of Financial Position
The balance sheet is the final statement prepared in the accounting cycle. While the trading and profit & loss account tells you about performance (profit or loss) over a period, the balance sheet tells you about position at a single point in time — what the business owns and what it owes.
Every account that remains after transferring all revenue and expense items to the trading and profit & loss account must appear in the balance sheet. These are the accounts of assets, liabilities, and capital.
The Two Sides
The balance sheet has two sides, presented side by side in the horizontal format:
- Left-hand side — called Liabilities. This side shows capital and all liabilities (amounts the business owes to others).
- Right-hand side — called Assets. This side shows all assets and other debit balances (everything the business owns or is owed by others).
The fundamental equation is simple: Liabilities + Capital = Assets. Both sides must always balance.
No Prescribed Form for Proprietary and Partnership Firms
For sole proprietorships and partnership firms, there is no legally prescribed format for the balance sheet. You can arrange the items in any order that is clear and logical. However, for companies, Schedule III Part I of the Companies Act 2013 prescribes a specific format and the order in which assets and liabilities must be shown.
The Standard Horizontal Format
Here is the general proforma used for a sole proprietor or partnership firm:
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Capital | ..... | Furniture | ..... |
| Add Profit | ..... | Cash | ..... |
| Long-term loan | ..... | Bank | ..... |
| Short-term loan | ..... | Goodwill | ..... |
| Sundry creditors | ..... | Sundry debtors | ..... |
| Bills payable | ..... | Land and Buildings | ..... |
| Bank overdraft | ..... | Closing stock | ..... |
| Total | xxxx | Total | xxxx |
The heading of the balance sheet always reads: Balance Sheet of [Name] as at [Date]. The phrase "as at" is critical — it means the position is shown at the close of business on that specific date.
How the Trial Balance Feeds the Balance Sheet
Refer to the trial balance of Ankit. It contains 14 accounts. Seven of these — all revenue and expense accounts — have been transferred to the trading and profit & loss account. Those seven are: Sales, Wages, Salaries, Commission received, Rent of building, Bad debts, and Purchases.
The remaining seven accounts are the ones that appear in the balance sheet. They are:
| Account Title | Debit (₹) | Credit (₹) | Nature |
|---|---|---|---|
| Cash | 1,000 | — | Asset |
| Bank | 5,000 | — | Asset |
| Capital | — | 12,000 | Capital |
| Creditors | — | 15,000 | Liability |
| 10% Long-term loan | — | 5,000 | Liability |
| Furniture | 15,000 | — | Asset |
| Debtors | 15,500 | — | Asset |
Notice that Capital has a credit balance of ₹12,000. But the business earned a profit of ₹4,500 (as computed from the trading and profit & loss account). This profit belongs to the owner and increases the capital. So in the balance sheet, the profit is added to the capital.
The Completed Balance Sheet of Ankit
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Capital 12,000 + Net Profit 4,500 | 16,500 | Furniture | 15,000 |
| 10% Long-term loan | 5,000 | Cash | 1,000 |
| Creditors | 15,000 | Bank | 5,000 |
| Debtors | 15,500 | ||
| Total | 36,500 | Total | 36,500 |
Both sides total ₹36,500 — the balance sheet balances.
Key Points to Remember
- Capital is shown on the liabilities side because the business owes this amount to the owner. It is not an external liability, but it is an obligation of the business to its proprietor.
- Profit increases capital. If there were a loss, it would be subtracted from capital.
- Long-term loan is a liability. The "10%" indicates the rate of interest payable on it, but the interest itself is an expense already dealt with in the profit & loss account. …