Accountancy · Ch 8 — Financial Statements - I
Balance Sheet
Balance Sheet
Balance Sheet
The balance sheet is a statement that shows the financial position of a business by summarising its assets and liabilities at a given date. It is prepared at the end of the accounting period, after the trading account and profit and loss account have been completed.
The name "balance sheet" comes from the fact that it contains the balances of those ledger accounts which have not been transferred to the trading and profit and loss account. These balances are carried forward to the next accounting year through an opening entry made in the journal at the beginning of the following year.
Nature of Balances
On the balance sheet, the assets represent debit balances, while the liabilities (including capital) represent credit balances. This is consistent with the fundamental accounting equation:
Assets = Liabilities + Capital
Purpose and Timing
The balance sheet is not an account — it is a statement. It is prepared on a specific date, not for a period. It shows what the business owns (assets) and what it owes (liabilities and capital) on that date.
What Goes Into the Balance Sheet
Only those ledger accounts that have not been closed by transfer to the trading account or profit and loss account appear in the balance sheet. These are:
- Real accounts (assets): Cash, debtors, stock, furniture, machinery, buildings, etc.
- Personal accounts (liabilities): Creditors, loans, bank overdraft, capital, drawings, etc.