Concepts and contents for balance sheet

Concepts for Balance Sheet Preparation and Its Contents

Financial Accounting

Balance Sheet

Meaning

A Balance Sheet is one of the financial statements. A Balance Sheet

is a statement of assets and liabilities of an enterprise at a given

date. It is also called Statement of Financial Position.

4 April 2015 Financial Accounting 2

Features of Balance Sheet

• A balance sheet is only a statement and not an account. It has

no debit side or credit side. The headings of the two sides are

‘Assets’ and ‘Liabilities’.

• It is prepared at a particular point of time and not for a

particular period. The information contained in it is true only at

the particular point of time at which it is prepared.

• It is a summary of balances of those ledger accounts which have

not been closed by transfer to the Trading and P & L Account.

• It shows the nature and value of assets and the nature and the

amount of liabilities at a given date.


Need of Balance Sheet

• To ascertain the nature and value of assets of a business.

• To ascertain the nature and amount of liabilities of a business.

• To find out the financial solvency of an enterprise. An enterprise

is considered to be a solvent if its assets exceed its external

liabilities.



Reliance-

Chairman’s

Statement(Source: Annual Report)

Sample of Horizontal Format


1. The Entity Concept


1. Business enterprise is a separate identity apart from its owners.

2. Business is distinct from owners.

3. Business transactions are recorded

in business books of accounts and

owner’s transactions in his personal

books of accounts.

4. The examples of entity includes proprietorship firm, partnership firm,

limited liability company, trusts, clubs, societies, private limited

companies, and public limited companies.

1. The Entity concept

5. Enterprise is liable to the owner for the money contributed/given to the

enterprise for doing business.

6. Since owner invested capital in the enterprise and takes risk he has claim

on profits of the enterprise also.

7. Obligation of enterprise towards owner is shown as below in the Balance

Sheet.


Balance Sheet (Proprietary Firm)

Liabilities Assets

Capital

(-) Drawings

(+) Profit

(-) Loss

Balance Sheet (Company)

Equities and Liabilities

Shareholders’ Funds

(a.) Share Capital

(b.) Reserves & Surplus

2. Money Measurement Concept

1. Only those transactions that can be measured in terms of money are

recorded in books of accounts.

2. Measuring unit for money is taken as the currency of the ruling country.

3. It is based on implicit assumption that purchasing power of money is not

of sufficient importance as to require adjustment.

4. Many material events and transactions are not recorded in the books of

accounts just because it cannot be measured in monetary terms.


3. Going Concern Concept

1. The business will continue in operation for the foreseeable future.

2. It is believed that enterprise has neither the intention nor the need to close

down the business or liquidate the business.

3. By virtue of this concept increase/decrease in the value of assets in the

short run is ignored.


4. Cost Concept

1. The value of the non current asset is to be determined on the basis of

original cost incurred by the company to purchase and bring the asset in

the working condition for its intended use. This cost is known as ‘Historic

Cost’.

2. Non current assets are booked at historical cost when acquired and

gradually in a systematic manner part of the cost is reduced due to

amortization. Reduced portion of cost is generally known as depreciation.

For Example -


Balance Sheet

Liabilities Assets

Plant & Machinery (cost)Less: Depreciation

Book value

Accounting Convention - Godrej


5. The Dual – Aspect Concept

Every transaction affects at least two items of accounting records known as

dual impact of transaction.

Accounting systems are set up so as to record both of these impacts of a

transaction preserving the equality of accounting equation.

Accounts are prepared on double entry system.


Contents of Balance Sheet


Basic Accounting Terms

1. Transaction – Events that affect the numbers

in an entity’s accounting records are called

transactions. It involves transfer of money

or money’s worth.

2. Entity – An entity means an economic unit that

performs economic activities (e.g. TESCO,

TELCO, Birla Industries, Reliance Industries,

Bajaj Auto, Raymond).

3. Entry – Entry is the record made in the books

of accounts in respect of a transaction or event.

An entry is passed on the basis of vouchers.


Basic Accounting Terms

4. Voucher – Voucher is a document which serves as an evidence of a

transaction. For example, in case of cash purchases, cash memos and in

case of credit purchases, purchase invoice are vouchers.


Equity is the residual interest of owners in the assets of the entity after

deducting all its liabilities. It is also called Shareholders’ Fund or Capital.

Liability is a present obligation of the arising from past events, the

settlement of which is expected to result in an outflow from the entity of

resources embodying economic benefits.

Shareholders’ Funds

(a) Share Capital - It is the amount

contributed by the shareholders towards

the company’s capital and is entered in

the company’s share capital account.


Items of B/S: Equity & Liabilities

(b) Reserves and Surplus –

It is a profit achieved by a company where a

certain amount of it is put back into the business

which can help the business in their rainy days.


Items of B/S - Equity & Liabilities

Those obligations that do not meet the criteria for being classified as current

liabilities are simply called non-current liabilities. For e.g. Mortgage, bonds and

long term leases etc.

(a) Long-Term Borrowings – Loans taken for a time period exceeding 12

months are classified as long term borrowings.

(b) Deferred Tax Liabilities - The tax effect of taxable

temporary differences is recognized as deferred tax liabilities

which are payable beyond 1 year period.

(c) Long-Term Provisions – It includes Provision for Employee Benefits.


Items of B/S – Non-Current Liabilities

These are normally paid by using existing current

assets, creating other current liabilities or fulfilling

contractual obligations to provide goods or services.

E.g. Bills Payables, Trade Payables, Bank Overdraft etc.

(a) Short-Term Borrowings – It includes Loans repayable on demand from

banks and other loans payable within duration of 12 months like commercial

papers.

(b) Trade Payables - The trade payables show the amounts owed to suppliers

for purchases of goods and services on credit.


Items of B/S – Current Liabilities

(c) Other Current Liabilities – It may include advances from customers and

other short term obligations of the company.

(d) Short-Term Provisions – Provision for Employee Benefits, Proposed

Dividend, Provision for Tax on Distributed Profit.


Items of B/S – Current Liabilities

An asset is a resource controlled by the entity as a result of past events

and from which future economic benefits are expected to flow to the

entity.

For e.g. Land, Building, Machinery, Equipment etc.


Items of B/S - Assets

(a) Fixed Asset - A fixed asset is an asset held with the intention of being

used for the purpose of producing or supplying goods or

services and is not held for sale in the normal course of business.

Tangible Fixed Assets – These have physical existence and can be seen

and felt. For e.g. Land, Buildings, Furniture, Equipment etc.

Intangible Fixed Assets – These are an identifiable non-monetary assets,

without physical substance, held for use in the production or supply of

goods or services, for rental to others, or for administrative

purposes. For e.g. Brand Names, Copyrights,

Goodwill, Patent etc.


Items of B/S – Non-Current Assets

Capital Work-In-Progress – It is referred to as assets under construction

that is not considered to be final product but must still be accounted for

because funds have been invested towards its production.

(b) Non-Current Investments – It is the investment which is for long period

and not releasable for current period. For e.g. investment in equity

instruments (subsidiary companies, associate companies), joint venture and in

preference shares and in partnership firm.



(c) Long-Term Loans and Advances –

It includes secured and unsecured loans and

advances with a duration of more than 12 months.

(d) Other Non-Current Assets –

It includes secured and unsecured interest accrued on loans.



Cash and other assets that are expected to be

realized in cash or sold or consumed during

the normal operating cycle of the entity or within

one year, whichever is longer, are called current assets.

(a) Current Investment – A current investment that is by its nature readily

realisable and is intended to be held for not

more than one year from the date on which

such investment is made.

For e.g. Investment in Mutual Funds.


Items of B/S – Current Assets

(b) Inventories – Inventories are assets which held

for sale in the ordinary course of business; in the process

of production for such sale or in the form of materials or

supplies to be consumed in the production process

or in the rendering of services.

(c) Trade Receivables – It includes the amounts receivable from customers for

sales of goods or services on credit.

(d) Cash and Bank Balances – It shows receipts and payments of cash. Cash

includes coins, currency, cheques and amounts deposited in banks.



(e) Short-Term Loans and Advances – It includes loans and advances like

loans to employees, advances to suppliers, loans and advances to subsidiary

and associate companies etc.

(f) Other Current Assets – It includes interest accrued on loans and deposits

and other receivables.



Concepts and contents for balance sheet

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