Balance Sheet

Definition: Balance Sheet is the final statement of the financial report prepared after trading and profit/loss account of a company. It shows the company’s exact financial position at the end of the financial year after evaluating the true and fair value of all the assets and liabilities of a business.

In short, it is the basic statement of the company that examines the financial competence by the resources organized and investments enforced by the businessman.

Content: Balance Sheet

1. Formula
2. Formats
   • Horizontal (Traditional Format)
   • Vertical Format
3. Need for preparing
4. Uses
5. Limitations
6. Conclusion

Formula of Balance Sheet

It is established on the elementary equation:

Where,

Total Assets = Current Assets (+) Current Liabilities
Total Liabilities = Current Liabilities (+) Non-Current Liabilities
Shareholder’s Equity = Retained capital (+) Retained Earnings

Formats of the Balance Sheet

It can be prepared in any of the two formats:

Horizontal (Traditional Format)

There are two popular methods in which the assets and liabilities can be organized in a traditional format. They are as follows:

1. In the order of dischargeability or liquidity

The assets are organized in order of their liquidity, the most liquid assets such as cash-in-hand are displayed first and least one such as goodwill will be shown at last. The liabilities are put in order of urgency of their payments. The urgent payments such as short-term creditors are displayed first, and least urgent payments like long-term creditors will be displayed at last. Generally, the banking concerns and partnership firms prepare their Balance Sheet in the order of dischargebility.

A format of Balance Sheet in order of dischargeability or liquidity is shown below:

Balance Sheet of XYZ Co. Ltd.
As at 31/03/2015

Liabilities	₹	Assets	₹
Current Liabilities:		Current Assets:
Outstanding expenses	xx	Cash-in-hand	xx
Bills payable	xx	Cash at bank	xx
Income received in advance	xx	Bills receivable	xx
Sundry creditors	xx	Prepaid expenses	xx
Bank overdraft	xx	Sundry debtors	xx
Long-Term Liabilities:		Accrued income	xx
Capital:		Closing stock	xx
Opening Balance	xx	Other Investments:	xx
(+) Net Profit	xx	Fixed Assets:
(-) Net loss	xx	Plant and machinery	xx
(-) Drawings	xx	furniture and fixture	xx
		Land	xx
		Building	xx
		Goodwill
	xxx		xxx

2. In the order of permanence

Order of the permanence is completely opposite of the liquidity order. The assets are organized according to their permanence, i.e., least one will be shown first, and most liquid assets will be shown at last. The least urgent payments will be displayed first, and the most urgent one will be shown at last. As per Companies Act 2013, all the companies recommended preparing the Balance Sheet in order of permanence.

A format of Balance Sheet in order of permanence is shown below:

Balance Sheet of XYZ Co. Ltd.
As at 31/03/2015

Liabilities	₹	Assets	₹
Capital:		Fixed Assets:
Opening Balance	xx	Land	xx
(+) Net profit	xx	Building	xx
(-) Net loss	xx	Goodwill	xx
(-) Drawings	xx	Furniture and fixture	xx
Long- term liabilities:		Plant and machinery	xx
Loans and advances	xx	Other Investments:	xx
Current Liabilities:		Current Assets:
Sundry creditors	xx	Closing stock	xx
Outstanding expenses	xx	Prepaid expenses	xx
Income received in advance	xx	Accrued income	xx
Bank overdraft	xx	Sundry debtors	xx
Bills payable	xx	Cash-in-hand	xx
		Cash at bank	xx
		Bills receivable	xx
	xxx		xxx

Vertical Format

Vertical Format for preparing the Balance Sheet is shown below:

Balance Sheet of XYZ Co. Ltd.
As at 31/03/2015

Particulars	₹	₹
(A) Fixed assets:
Land	xx
Plant and machinery	xx
Building	xx
Furniture and fixture	xx
(B) Current assets:
Stock	xx
Bills receivable	xx
Sundry debtors	xx
Cash-in-hand	xx
Cash at bank	xx
(C) Current liabilities:
Bills payable	xx
Sundry creditors	xx
Outstanding expenses	xx
(D) Working capital [ B- C ]	xx
(E) Net assets employed [ A + D ]		xxx
(F) Financed by:
Capital	xx
(+) Net profit	xx	xxx

Need for preparing Balance Sheet

Every business organization needs to prepare a Balance Sheet because of the following reasons:

1. To determine the structure and value of the assets of the company.
2. To determine the nature and volume of the liabilities of the company.
3. To identify the financial competence of a company. A company is treated as indebted if its assets overtake its external liabilities.

Uses of Balance Sheet

Balance Sheet is treated as an important accounting report. In any business number of parties are involved, if any of them require any information about the business activities of the financial year, they can refer to the Balance Sheet of the company.  Broadly, the following information can be borrowed from it:

1. It facilitates to determine the proprietary interest of an individual or business enterprises.
2. It empowers the businessman to calculate the substantial capital engaged in the business.
3. It helps the creditors of the company in verifying the financial status of the business.
4. It may provide the basis for deciding purchase consideration of the business.
5. The movement of the working capital of a business can be driven by analyzing the Balance Sheets of the subsequent years. If required, curative measures can opt in a stipulated time.
6. Divergent ratios can be determined from it, and these ratios can be applied for the enhanced governance of the business.

Limitations of the Balance Sheet

However, the Balance Sheet is prepared by all the establishments for revealing the financial condition; still, it has the following limitations:

1. Fixed assets are conferred in the Balance Sheet at a historical cost minus (-) depreciation up to that date. A traditional Balance sheet cannot reveal the true values of the assets. Further, intangible assets are displayed in it at book value which may form no connection to market values.
2. Consistently, it accommodates some assets which determine no market value like debentures discount, preliminary expenses, etc. The involvement of these assets excessively increases the total value of the other assets.
3. It cannot display the value of definite factors like loyalty and skill of the personnel.
4. The financial worth of a large number of current assets rely upon some measures, so it can’t reveal the accurate financial position of the business.

Conclusion

A Balance Sheet is a statement of the assets and liabilities containing the balances of the accounts arranged on a particular date. It is inclined to disclose the accurate and impartial view of the state of affairs of the business, and it is prepared after preparing the trading and profit and loss account of the business.