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How to prepare a Balance Sheet?

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  • Last Updated : 04 Aug, 2022
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The Balance Sheet is the statement showing the business’s financial position at a given time. It is the statement showing the value of assets and liabilities of a firm at a certain date. The Balance Sheet shows the report of the property owned by the enterprise and the claims of the creditors and owners against these properties. The total of both sides (i.e., assets and liabilities) of the balance sheet should be equal.

The financial position of a firm is shown by its assets and liabilities on the given date. A company is financially stable when the assets are more than the liabilities, and it represents capital. The Balance Sheet is prepared from the Real Accounts and Personal Accounts. Ledger accounts that have not been closed having debit balances are shown on the assets side and those having credit balances are shown on the liabilities side.

“A Balance Sheet is a screen picture of financial position of a going business at a certain moment.” –Francis R. Stead

Need for Balance Sheet:

1. Balance Sheet shows the business’s financial position at a glance at a particular time.

2. Balance Sheet shows the financial position of the business in a systematic and standard form.

3. Balance Sheet states whether the business is solvent or not. If the value of the assets is more than the liabilities, the firm is solvent and if the liabilities exceed over assets, the firm is insolvent.

4. Balance Sheet helps us to determine the purchase consideration of the business.

5. Balance Sheet is prepared to measure the true financial position of the firm at a particular date.

Preparation of Balance Sheet:

 

Grouping and Marshalling of Assets and Liabilities:

Assets are the economic property of the business including fixed and current assets. Liabilities mean all the claims against the assets of the business including outsiders and owners of the business. In the Balance Sheet, Assets and Liabilities should be arranged in a certain order. Assets and Liabilities are either in the order of liquidity or in the order of permanence.

Assets and Liabilities are arranged in groups and in a particular order, this is called Grouping and Marshalling of the Balance Sheet. The arrangement of similar items of similar nature under one head is called Grouping and the arrangement of assets and liabilities in a particular order is Balance Sheet is called Marshalling. 

A. In the Order of Liquidity:

Under this method, assets and liabilities are arranged according to their liquidity, i.e., items that can be easily converted into cash within a short period. Assets that are the most liquid( e.g., cash in hand) are written first, and thereafter the least liquid are written last (e.g., goodwill). Liabilities are arranged in their order of urgency of payment, i.e., the short-term liabilities (short-term creditors) written at first and thereafter the least urgent payment followed by capital at last.

Balance Sheet in order of liquidity is generally used by the Banking and Financial Companies, Sole Proprietorship and Partnership firms.  

 

B. In the Order of Permanence:

Under this method, assets and liabilities are shown based on being permanent in the firm. Assets that are used permanently in the business and are held not for sale are written first ( e.g., Goodwill) and the most liquid assets are written last (e.g., cash in hand). Liabilities, which are least urgent (e.g., owners) to be paid off are written first after capital, and the debts to be paid immediately (e.g., creditors) are written first.

Under the Companies Act, 1956, the companies are required to prepare balance sheets under this method. 

 

Illustration: 

From the following Trial Balance of Geeks Ltd. on 31st March,2022. Prepare the prepare necessary final accounts.

 

Closing stock on 31st March 2022 was ₹82,000.

Solution:

 

 

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