Q.What do you understand by contingent liability?
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Balance Sheet Presentation – A First Look
Think of your own finances. You have some things you own – a phone, a bike, maybe some cash in your pocket. And you have some things you owe – maybe you borrowed money from a friend, or you have a pending fee payment. If you wrote down everything you own on one side and everything you owe (plus what's truly yours) on the other, you'd have a personal balance sheet.
That's exactly what a company does. The Balance Sheet is a snapshot of a business's financial position at a single point in time – usually the last day of the accounting year. It shows two sides that must always be equal:
Assets = Liabilities + Capital
This is the fundamental accounting equation. The Balance Sheet is not an account – it's a statement. It doesn't get debited or credited. It simply presents the balances of real accounts (assets) and personal accounts (liabilities) plus the capital account, after all transactions for the year have been recorded and the Profit & Loss Account has been closed.
Why Does It Matter?
The Balance Sheet answers three critical questions for anyone reading it – owners, banks, investors, tax authorities:
- What does the business own? (Assets – from cash to machinery to buildings)
- What does the business owe to outsiders? (Liabilities – loans, creditors, outstanding expenses)
- What is the owner's stake? (Capital – the net worth)
If the Balance Sheet doesn't balance, something is wrong in the books. That's why it's the final check after preparing the Trial Balance and the Profit & Loss Account.
The Format (as per NCERT Class 12)
The Companies Act, 2013 prescribes a specific format for the Balance Sheet. It is divided into two sides:
| Left Side (Liabilities + Capital) | Right Side (Assets) |
|---|---|
| 1. Shareholders' Funds | 1. Non-Current Assets |
- Share Capital | - Fixed Assets (Tangible & Intangible)
- Reserves & Surplus | - Non-Current Investments
- Money received against share warrants | - Long-term Loans & Advances 2. Share Application Money pending allotment | 2. Current Assets 3. Non-Current Liabilities | - Current Investments
- Long-term Borrowings | - Inventories
- Deferred Tax Liabilities (Net) | - Trade Receivables
- Other Long-term Liabilities | - Cash & Cash Equivalents
- Long-term Provisions | - Short-term Loans & Advances 4. Current Liabilities | - Other Current Assets
- Short-term Borrowings |
- Trade Payables |
- Other Current Liabilities |
- Short-term Provisions |
This is the vertical format (also called the "order of liquidity" format) used by companies. For sole proprietors and partnerships, a simpler horizontal format is common, but the principle is identical.
Accounting Treatment – What Gets Debited/Credited?
The Balance Sheet itself is never debited or credited. It is a statement of balances. However, the items that appear on it come from accounts that were debited or credited during the year.
Here's how the major items originate:
| Balance Sheet Item | Originates From | Debit/Credit Nature |
|---|---|---|
| Capital | Capital Account | Credit balance (owner's claim) |
| Reserves & Surplus | Profit & Loss Appropriation Account | Credit balance (undistributed profit) |
| Long-term Borrowings | Loan Account (e.g., Bank Loan) | Credit balance (liability) |
| Trade Payables | Creditors Account | Credit balance (amount owed) |
| Fixed Assets | Asset Account (e.g., Machinery A/c) | Debit balance (what the business owns) |
| Inventories | Stock Account | Debit balance (goods on hand) |
| Trade Receivables | Debtors Account | Debit balance (amounts due from customers) |
| Cash & Bank | Cash/Bank Account | Debit balance (positive cash) |
A common mistake: students think the Balance Sheet is "balanced" by making a journal entry. No – it balances because the accounting equation always holds. Every debit has a matching credit somewhere.
--- …
A contingent liability is not an actual liability yet; it is a possible obligation that will arise only if an uncertain future event occurs. This is why it is only disclosed, not recorded. …
A contingent liability is a possible, not actual, liability that arises only if an uncertain future event occurs; it is disclosed by a note, not recorded.
A contingent liability is one that may or may not become a real liability, depending on a future uncertain event. Common examples are claims against the company not acknowledged as debts, liability on bills receivable discounted but not yet matured, guarantees given, and disputed tax or legal demands. Because it is uncertain, it is not entered as a liability in the Balance Sheet; instead it is disclo …
Showing the 12 most recent of 63 on this concept.
- CBSE 2026Set MARCH1 markQ.Loans which are repayable within __________ months, are called as short-term borrowings.
›Reveal solutionSolution
Loans repayable within 12 months are called short-term borrowings.
As per Schedule III of the Companies Act, 2013, a liability is classified as current if it is expected to be settled within twelve months from the reporting date. Borrowings meeting this condition are shown under Current Liabilities as short-term borrowings; borrowings repayable after twelve months are long-term (non-current) borrow …
- CBSE 2026Set ANNUAL1 markMCQQ.According to Indian Companies Act, 2013, the term "Sundry-creditor" has been replaced by which term? A) Trade receivables B) Trade payables C) Trade debtors D) Bills payables
›Reveal solutionSolution
'Sundry Creditors' is now shown as 'Trade Payables' under the Companies Act, 2013 - option (B).
The revised Schedule III format modernised the balance-sheet terminology that RBSE / CBSE Class-12 Accountancy follows:
- Sundry Creditors -> Trade Payables (option B). …
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: Those Assets, which are realised within __________ months are called current assets. (12/24)
›Reveal solutionSolution
Assets realised within 12 months are classified as current assets.
As per Schedule III of the Companies Act, 2013, an asset is treated as current if it is expected to be realised within twelve months after the reporting date (or within the firm's normal operating cycle, or is held primarily for trading, or is cash/cash equivalent). Ass …
- CBSE 2026Set ANNUAL1 markMCQQ.Current liabilities include(a) Sundry creditors(b) Outstanding expenses(c) Bills payable(d) All of these
›Reveal solutionSolution
All the listed items are current liabilities - option (d).
Current liabilities are obligations payable within a short period (normally one year). Sundry creditors (trade payables), outstanding expenses (expenses incurred but not yet paid) and bills payable (short-term promis …
- CBSE 2026Set ANNUAL1 markMCQQ.The Balance Sheet of a company is prepared according to which schedule of the Indian Companies Act 2013?(a) Schedule I(b) Schedule II(c) Schedule III(d) Schedule V
›Reveal solutionSolution
Correct option: (c) Schedule III.
Section 129 of the Companies Act, 2013 requires every company to prepare its Balance Sheet in the vertical form prescribed in Schedule III of the Act. So th …
- CBSE 2026Set ANNUAL1 markMCQQ.Office Building under construction which may take 3 to 4 years for completion will be shown under _______ in the Balance Sheet of the Company.(a) Intangible assets under development(b) Capital work in Progress(c) Non-Current Assets(d) Work in Progress(a) Intangible assets under development(b) Capital work in Progress(c) Non-Current Assets(d) Work in Progress
›Reveal solutionSolution
Office Building under construction is shown under Capital Work in Progress (Option B).
'Capital Work in Progress' (CWIP) represents the cost incurred so far on fixed assets that are being constructed or installed but are not yet ready for their intended use. Since the office building here will take 3 to 4 more years to complete, it is not yet a usable (operational) fixed asset; it cannot be depreciated or classified as a completed Building. It is disclosed as a separate line under Non-current Assets → Fixed Assets → Capital Work in Progress, …
- CBSE 2026Set ANNUAL1 markMCQQ.Under which Sub-head will "Patents and Trademark" appear in the Balance Sheet of a Company as per Schedule III of Company's Act, 2013 ?(a) Intangible Assets(b) Tangible Assets(c) Other Current Assets(d) Other Non-current Assets
›Reveal solutionSolution
Patents and Trademarks are shown under the sub-head "Intangible Assets" (within Fixed Assets, under Non-Current Assets).
As per the Schedule III format of the Balance Sheet (Companies Act, 2013), the asset side is classified as follows:
II. Assets
1. Non-current Assets
(a) Fixed Assets
(i) Tangible Assets — Land, Building, Plant & Machinery, Furniture & Fixtures, Vehicles (assets with physical existence)
(ii) Intangible Assets — Goodwill, Patents, Trademarks, Copyrights, Computer Software (assets with NO physical existence but having a long-term, identifiable value to the business)
(iii) Capital Work-in-Progress
(iv) Intangible Assets under Development
…
- CBSE 2025Set 67/6/11 markMCQQ.There are two statements : Statement I : The balance in the Statement of Profit and Loss in the Balance Sheet of Samta Ltd. showed a deficit of ₹ 2,00,000 on 31.03.2023 and a surplus of ₹ 3,00,000 on 31.3.2024. ₹ 5,00,000 will be considered as profit earned during the year for preparing Cash Flow Statement. Statement II : On 31.03.2023 the goodwill account of Zeeta Ltd. showed a balance of ₹ 4,00,000 and on 31.03.2024 it showed a balance of ₹ 5,00,000. ₹ 1,00,000 will be considered as goodwill acquired during the year for the preparation of Cash Flow Statement. Choose the correct option from the following : (A) Both the Statements are true. (B) Both the Statements are false. (C) Statement I is true, Statement II is false. (D) Statement II is true, Statement I is false.
›Reveal solutionSolution
Both Statement I, which calculates the profit earned during the year for Cash Flow Statement purposes, and Statement II, which identifies goodwill acquired during the year, are correct based on standard accounting principles.
Let's break down each statement to understand the underlying accounting concepts and their treatment in the preparation of a Cash Flow Statement.
Concept and Treatment
Statement I: Profit and Loss Balance for Cash Flow Statement
The Statement of Profit and Loss (P&L) balance shown in the Balance Sheet represents the accumulated profits or losses of the company up to that date. When preparing a Cash Flow Statement (CFS) using the indirect method, we need to determine the profit earned during the current year to arrive at the Net Profit Before Tax and Extraordinary Items. This figure is crucial because it forms the starting point for adjusting non-cash items and non-operating items to calculate cash flow from operating activities.
If the P&L balance shifts from a deficit (an accumulated loss, which is a debit balance) to a surplus (an accumulated profit, which is a credit balance), the profit generated during the year must have been sufficient to first cover the entire opening deficit and then create the closing surplus. The sum of these two amounts represents the total profit available for appropriation during the year.
Statement II: Goodwill Account for Cash Flow Statement
Goodwill is an intangible asset. An increase in the balance of any asset account, including goodwill, generally indicates that the asset has been acquired during the accounting period. In the context of a Cash Flow Statement, the acquisition of an asset (whether tangible like machinery or intangible like goodwill) is classified as a cash outflow under Investing Activities. This is because cash is used to purchase long-term assets that are expected to generate future economic benefits for the business. Conversely, a decrease in goodwill could be due to its amortisation (a non-cash expense) or its sale (a cash inflow).
Working Notes
-
Working Note 1: Calculation of Profit Earned During the Year (Statement I)
- Opening Balance of Statement of Profit and Loss (as on 31.03.2023) = Deficit of ₹ 2,00,000 (This is a debit balance).
- Closing Balance of Statement of Profit and Loss (as on 31.03.2024) = Surplus of ₹ 3,00,000 (This is a credit balance).
To calculate the profit earned during the year, we need to determine the total change from the opening deficit to the closing surplus.
- Amount of profit required to cover the opening deficit = ₹ 2,00,000
- Amount of profit required to create the closing surplus = ₹ 3,00,000
- Total Profit Earned During the Year = ₹ 2,00,000 (to cover deficit) + ₹ 3,00,000 (to create surplus) = ₹ 5,00,000. …
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- CBSE 2025Set MARCH1 markQ.Under which head goodwill is shown in the balance-sheet?
›Reveal solutionSolution
Goodwill appears under Non-current Assets, sub-head Fixed Assets — Intangible Assets, in a company's balance sheet (Schedule III).
In GSEB Class-12 Commerce Accountancy (Financial Statements of a Company):
- Under the equity-and-liabilities/assets format, goodwill is an intangible asset.
- It is disclosed under Non-current Assets → Property, Plant & Equipment and Intangible Assets → Intangible Assets. …
- CBSE 2025Set MARCH1 markQ.Give an example for non-current liabilities.
›Reveal solutionSolution
Example of a non-current liability: long-term borrowings such as debentures or a long-term loan.
Under Schedule III of the Companies Act, 2013, non-current liabilities are those that do not fall due for payment within twelve months (or the operating cycle). They include long-term borrowings (debentures, bonds, long-term loans from banks/financial institutions), long-ter …
- CBSE 2025Set ANNUAL1 markMCQQ.Provision for Tax is (A) Current liabilities (B) Internal reserve (C) Both (A) and (B) (D) None of these
›Reveal solutionSolution
Provision for tax is created by charging profit to meet a known future tax obligation; it is shown as a current liability and also represents an internal reserve (a provision out of profits). Hence the answer is (C) Both (A) and (B).
For Bihar Class-12 (BSEB Inter) commerce candidates:
- As a current liability: tax on the year's profit is expected to be paid within the near future, so provision for tax is shown among current liabilities (short-term provisions) in the company's Balance Sheet. …
- CBSE 2025Set ANNUAL1 markMCQQ.Patents and copyrights fall under which category ? (A) Current Assets (B) Liquid Assets (C) Intangible Assets (D) All of these
›Reveal solutionSolution
Patents and copyrights are long-term rights owned by the business that have value but no physical form, which makes them intangible assets. Hence the answer is (C) Intangible Assets.
For the BSEB Inter / Bihar Class-12 Accountancy syllabus, assets are classified by their nature:
- Tangible assets: have physical existence (land, building, plant, machinery).
- Intangible assets: have no physical existence but give long-term benefits and are owned by the business — goodwill, patents, copyrights, trademarks, computer software. …
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