Balance sheet is a statement of assets and liabilities on a particular date. It depicts what the business owns and what it owes on a given date. Balance sheet is prepared for a particular date and not for a particular period. Therefore, a balance sheet provides true and fair view only on the date at which it is prepared and not on any other date. It provides stakeholders necessary information about the financial health of the business entity.
Some of the Items appearing in the Balance Sheet
Capital: It is the amount contributed by the owners to the business. It is a liability of the business entity towards its owners.
Reserve: It is a portion of profit set aside for specific purposes. It belongs to the owner. Reserve is created to strengthen the financial position of the entity.
Assets: Assets can be classified as real assets or fictitious assets. Real assets can be classified further as fixed assets or current assets. Fixed assets can be tangible assets or intangible assets.
Fixed assets: Fixed assets acquired by an entity are intended to be used for more than one year. They give benefit to the business for more than one year. Most of the fixed assets reduce in value due to wear and tear, passage of time etc. even if they are not put to use. Hence, depreciation need to be provided to present those assets at their true value. However, fixed assets such as land appreciates in value over the passage of time. Fixed assets can be tangible or intangible.
- Tangible fixed assets: Tangible fixed assets have physical existence. They can be seen and touched. For example- building, plant and machinery etc.
- Intangible Assets: Intangible assets have no physical presence. They can not be seen or touched. However, they fulfil the criteria to qualify as a fixed asset. E.g.- Goodwill, patents etc. Depreciation is not allowed on intangible assets, however if such assets are purchased for a price, then depreciation is allowed.
Current assets: Current assets are acquired for short term use. They are meant for subsequent conversion into money. E.g.- Inventories, cash at bank, cash in hand etc.
Fictitious assets: Fictitious assets are expenditure or losses with no tangible possession of property. Accordingly, they have no market value. E.g.- Preliminary expenses etc.
Long term liabilities: Long term liabilities are repayable beyond a period of one year. E.g.- Debentures, long term loan from banks etc.
Current liabilities: Current liabilities are usually payable within a period of one year. E.g.- Accounts payable, bank overdraft etc.
Arrangement of assets and liabilities in the Balance Sheet
In balance sheet, the total of all assets must be equal to the total of all liabilities. The assets and liabilities should be presented in such a manner, that it depicts a clear picture of the state of affairs of an entity and financial position of the entity can be assessed easily. Assets can be shown either in the order of liquidity or in the order of permanence. In case of liquidity order, assets are shown in the order of the degree of ease with which they can be convertible into cash. Here, the more liquid assets are shown first and less liquid assets are shown thereafter. On the other hand, in case of permanency order, assets are shown in the order of desire to keep the assets. Here, the more permanent assets are shown first and less permanent assets are shown next. Similarly, the liabilities can also be shown in two ways- in the order of urgency of payment or in the reverse order. In case of the order of urgency of payment, the liabilities which are payable within a short period of time are shown first, then long term liabilities are shown and capital is shown at the last. In the case of reverse order, capital is shown first, long term liabilities are shown next and the liabilities which are payable within a short period of time are shown at the last. However, organizations such as companies, banks have to follow the formats as provided by the respective Acts applicable to them.
Conclusion
Balance sheet depicts the financial position of a business at a particular date. On one hand it shows the assets of the business and on the other hand it shows the liabilities of the business. It helps the stakeholders to ascertain the short-term and long-term solvency of the business. By comparing the balance sheets of different dates, stakeholders can study the trend of the business. A comparative balance sheet also helps in evaluation of the financial position of a business over a number of years.