Balance sheet is a statement which shows assets and liabilities of the business firm on a particular date. Balance sheet is not an account, it is only a statement. At the end of the year, the balances of all accounts relating to income and expenditures are transferred to profit and loss account and the balances of remaining accounts are shown in the balance sheet. The balances shown in balance sheet are shown as opening balances in next financial year.
Balance sheet is prepared annually or at the end of the financial year. In India, financial year is from 1st April to 31st March. In some countries, financial year is the calendar year i.e. 1st January to 31st December.
In India there are two formats of preparing of the balance sheet:-
1) Horizontal format:- In horizontal format of balance sheet, the figures are shown in two parts of balance sheet as under:-
2) Vertical format:- In vertical format of balance sheet the figures are shown in two parts of balance sheet as under:-
- Sources of Funds:- All the liabilities are shown under this head.
- Application of Funds:- All the assets are shown under this head.
In both formats, the difference is only the presentation. The figures and accounts heads are not affected at all.
CONTENT OF BALANCE SHEET
Following items are shown in balance sheet:-
1. CAPITAL (Owner’s Equity)
The structure of Capital or owner’s equity differs according to the different type of business organizations. For example:-
In Partnership Firm, the capital is shown as Partner’s Capital.
In Proprietorship Firm, the capital is shown as Proprietor’s Capital account.
Reserve and surplus is shown in the balance sheet of limited companies only. This is the part of shareholder’s fund. Reserve and surplus is again divided in following parts:-
- Capital Reserves
- Capital Redemption Reserves
- Share Premium Account or Securities Premium Account
- General Reserves (Reserves for any specific reasons etc.)
- Surplus (Balance in profit and loss account after providing for proposed allocations, namely, dividend, bonus or reserves
- Sinking Fund
Secured loans are those loans which are accepted by the business firm against any specific or rolling assets of the company. We can classify the secured loans as follow:-
- Loans from banks
- Loans subsidiaries
- Other loans
- Interest accrued and due on secured loans
Unsecured loans are those loans which are accepted by the business firms without any charge or mortgage. For example:-
- Fixed deposits
- Loans from subsidiaries
- Short term loans
- From banks
- From others
A) CURRENT LIABILITIES
Current liabilities are those liabilities which are normally settled within one year. We call them as rolling liabilities also. Current liabilities include the followings:-
- Bills payable
- Sundry creditors
- Bank overdraft
- Cash credit facilities
- Subsidiaries Companies
- Credit balances of debtors.
- Outstanding expenses or Expenses payable
- Unclaimed dividends
- Other liabilities (if any)
- Interest accrued but not due on loans
Provision means when any amount is kept separate for certain purpose and also debited in profit and loss account but not paid in current financial year. For example:-
- Provision for taxation
- Proposed dividend
- For contingencies
- For provident fund scheme, pension and similar staff benefit scheme
- Other provisions.
1. FIXED ASSETS
These assets are also called long term assets. Fixed assets are shown in balance sheet at their historical cost less depreciation. The depreciation rates are determined in income tax rules or companies act. Following are the examples of fixed assets:-
- Railway sidings
- Plant and machinery
- Furniture and fittings
- Development of property
- Patents, trade marks and design
When any business firm invests some money other than its business activities then it will treated as investments. Normally, the investment is made in marketable securities or bonds or mutual funds or debentures etc.
A). CURRENT ASSETS
Current assets are those assets which are mostly settled within a year and according to business trade the net amount of these assets keeps changing on through out the year. For example:-
- Sundry debtors
- Bills receivables
- Closing Stock
- Interest accrued on investments
- Cash balance on hand
- Bank balances
- Security Deposits
- Fixed Deposits with banks
B). LOANS AND ADVANCES
When the loans are given or the amount is paid in advance, by a business firm, shall come under this category.
- Advances and loans to subsidiaries
- Advances and loans to partnership firm in which the company or any of its subsidiaries is a partner
- Taxes paid in advance
- Advances paid to suppliers.
- Prepaid Expenses
4. MISCELLANEOUS EXPENDITURE
These are basically, revenue expenditures but these expenditures are written off in more than two years because the effect of these expenditures is seen in more than one years. These expenditures are also called as deferred revenue expenditures. Following are the examples of these expenditures:-
- Preliminary expenses
- Expenses including commission or brokerage on underwriting or subscription of shares or debentures
- Discount allowed on the issue of shares or debentures
- Interest paid out of capital during construction (also stating the rate of interest)
- Development expenditure not adjusted
- Other sums (Specifying nature)
5. PROFIT AND LOSS ACCOUNT
This is shown only when its debit balance could not be written off out of uncommitted reserves.