Q.Arranging assets in the Balance Sheet starting with the LEAST liquid item (such as Goodwill or Land) and ending with Cash is known as:
(A) Order of Liquidity
(B) Order of Permanence
(C) Grouping
(D) Cross-referencing

Financial position is ascertained from the Balance Sheet, so the answer is option (c).

Understanding the terms

• Financial position answers the question: what does the business own (assets) and what does it owe (liabilities and capital) on a particular date?
• The Balance Sheet is a statement of assets and liabilities prepared at the end of the accounting period. It is not an account; it is a snapshot on a fixed date.

Why the other options are wrong

• (a) Journal and (d) Ledger only record and classify transactions; they do not by themselves show the overall position. …

Goodwill is an intangible asset — option (d).

Classifying goodwill

• Tangible assets have a physical form — land, building, machinery, stock.
• Intangible assets have no physical form but have money value and help the business earn — goodwill, patents, trademarks, copyrights.
• Goodwill is the monetary value of a firm's good name, reputation and customer relationships. It cannot be touched but is valuable and long-lasting, so it is a fixed intangible asset.

Why not the others? …

Drawings shown in the trial balance are subtracted from the capital — option (d).

What are drawings?

• Drawings are amounts of cash or goods withdrawn by the proprietor from the business for personal use.
• Because this reduces the amount the owner has invested, drawings reduce capital.
• In the balance sheet, capital is shown on the liabilities side and drawings are deducted from capital (along with any net loss), while net profit is added.

Treatment in the capital section (liabilities side):

Financial position is judged from the assets and liabilities, which are shown in the Balance Sheet, so the correct answer is option (a).

The two objectives of final accounts differ:

• The Trading and Profit & Loss account shows the profitability (result of operations) for a period.
• The Balance Sheet is a statement of assets and liabilities on a particular date and reveals the financial position of the business. …

A Balance Sheet shows the financial position of a business on a particular date.

The Balance Sheet is a statement (not an account) prepared at the end of the accounting period listing all the assets and liabilities of the business as on a particular date. It therefore reveals the financial position — the soundness or solvency — of the business: what it owns (assets) and what it owes (liabilities and capital).

• Sales and purchases are shown in the Trading Account. …

Financial position is ascertained from the balance sheet, so the answer is (a).

The balance sheet is a statement of the assets, liabilities and capital of a business as on a particular date. By showing what the firm owns (assets) against what it owes (liabilities and capital), it reveals the financial position or soundness of the business.

…

Closing stock is unsold goods realisable within a year, so it is a current asset — option (d).

Classifying assets:

• Fixed assets — long-term assets held for use (machinery, building).
• Current assets — assets that are cash or are expected to be converted into cash / consumed within one year (stock, debtors, cash, bills receivable).
• Intangible assets — non-physical assets (goodwill, patents).
• Fictitious assets — not real assets but deferred expenses/losses (preliminary expenses). …