The main objective of accounting is to convey information.

This
objective is achieved by different accounting reports prepared by
a company. One of the most important reports is the Balance
Sheet.
Balance Sheet is concerned with reporting the financial position of
a company at a particular point in time. The balance sheet shows
the assets and liabilities classified and arranged in a specific
manner.

Q. What is a Balance Sheet? What are the objectives of

preparing Balance Sheet? Explain its characteristics.

After ascertaining the profit or loss of the business, the

businessman wants to know the financial position of his business.
For this purpose he prepares a statement of Assets and Liabilities,
which is called Balance Sheet. It is prepared on a specified date
because the figure shown in the Balance Sheet is true on that
date only. The totals of the Assets and Liabilities should be equal.
If it is not so, it means that there is some error.

The Committee on Terminology of American Institute of

Certified Public Accountants has defined the balance sheet
as, "a list of balances in the assets and liability accounts. This list
depicts the position of assets and liabilities of a specific business
at a specific point of time."
Objectives of Balance Sheet:
The following are the objectives of preparing a balance sheet:
1. Principal Objective: The main purpose of preparing
balance sheet is to know the financial position of the
business at a particular date.
2. Subsidiary Objectives: Though the main aim is to know
the exact financial position of the firm at a particular date,
yet it serves other purpose as well.
i. It gives information about the actual and real owner’s
equity. Though the capital of the owner indicates
 owner’s equity, yet some other liabilities are to be
accounted for against it also.
ii. It helps the firm to make provisions against possible
future losses. A provision is made in the form of the
Reserves.
Characteristics of Balance Sheet:
The Balance Sheet as distinct from other financial
statements has the following characteristics:
1. It is a statement and not an account. Although balance
sheet is a part of the final accounts and prepared with the
help of accounts, yet it is not an account but a statement.
2. It is always prepared on a particular date, and thus shows
the position at that date and not for a period.
3. It has no debit side and credit side. Nor the words ‘To’ and
‘By’ are used before the names of the accounts shown
therein. The headings are Liabilities and Assets.
4. It shows the financial position of the business concern.
5. It shows what the firm owes to others and also what others
owe to the firm.
The totals of Liabilities and Assets always are equal.
Q. Short note on uses of Balance Sheet.
The balance sheet reflects the financial position of the enterprise.
It provides useful information to various users. The balance sheet
is described as a snapshot of the financial position of a business
entity. The various groups interested in the company can draw
useful inferences from an analysis of the information contained in
the balance sheet. The balance sheet is also called the position
statement.

1. It shows the financial position of the business concern.

2. It shows what the firm owes to others and also what others
owe to the firm.
3. It shows the nature and value of the assets.
 It also reflects the liquidity of a firm.
What information does it convey to an outsider?
Balance sheet is prepared with a view to measure the true
financial position of a business concern at a particular point in
time. It shows the financial position of a business in a systematic
form. It is a screenshot of the financial position of the business.
At one glance, the position of the business, at a particular point
of time, can be understood.
The various groups interested in the company can draw useful
inferences from an analysis of the information contained in the
balance sheet.
Shareholders usually have twin interests, an interest in receiving
a regular income and an interest in the appreciation of their
investment in shares. Investment decisions of the prospective
investors and dis-investment decisions of the existing investors
are influenced by the composition of assets and liabilities shown
in the balance sheet.
Similarly, other interested parties like regulatory and
developmental agencies of the government, consumer, and
welfare organizations can derive useful conclusions from a study
of the balance sheet about the working of the corporate sector
and its contribution to the national economy.

Classification of Items:

Q. Explain the meaning of:

Owner’s Equity
Assets
Fixed Assets
Accrued Liabilities
Contingent Liability
Accounts Receivables
Owner’s Equity
Owner’s Equity is the residual interest in the assets of the
enterprise. Therefore the owner’s equity section of the balance
sheet shows the amount the owner have invested in the entity.
However, the terminology ‘owner’s equity’ varies with different
forms of organization depending upon whether the enterprise is a
joint stock company or sole proprietorship/partnership concern.
Sole proprietorship/partnership concern: The ownership
equity in a sole proprietorship or partnership is usually reported
in the balance sheet as a single amount for each owner rather
than distinction between the owner’s initial investment and the
accumulated earnings retained in the business.
Joint Stock Company: In the case of joint stock companies,
according to the legal requirements, owners’ equity is divided into
two main categories. The first category called share capital or
contributed capital. It is the amount that owners have invested
directly in the business. The second category of owners’ equity is
called retained earnings.
In the other words Owners’ equity is the claim against the assets
of a business entity. It could be expressed total assets of a
company less claims of outsiders or liabilities.
Assets
"The entire property of all kinds possessed by or owing to a
person or organisation is called assets". "Assets are valuable
resources owned by a business and acquired at a measurable
money cost". They may be:
a. Fixed Assets: These are those assets, which are acquired
for relatively long periods for carrying on the business of the
enterprise. Such assets are not meant for resale. For
example, Land and Building, Plant and Machinery etc.
b. Current Assets: These assets are also termed as ‘Floating
or Circulating Assets’. Such assets are acquired with the
intention of converting them into their values constantly.
The essential difference between ‘Current Assets’ and ‘Fixed
Assets’ is that the current assets are held essentially for a
short period and they are meant for converting into cash.
Unsold stock, debtors bills receivables, bank balance, cash in
 hand, etc are some of the examples of current assets.
According to the Institute of Chartered Public Accountants,
U.S.A., "Current Assets include cash and other assets or
resources commonly identified as those which are
reasonably expected to be realised in cash or sold or
consumed during the normal operating cycle of the business.
c. Fictitious Assets: Assets of no real value but included in
the balance sheet for legal or technical reasons, e.g.,
preliminary expenses.
d. Tangible and Intangible Assets: Tangible assets are
those assets, which can be seen and touched i.e. assets
having their physical existence e.g. land and building, plant
and machinery, furniture and fixtures, stock-in-trade, cash,
etc. Intangible assets cannot be normally sold in the open
market since they are not having any physical existence e.g.
goodwill, patents, trade marks, prepaid expenses etc.
e. Liquid Assets: Assets that can be easily converted into
cash like Bank account, Bills receivables, etc. As a matter of
fact, all current assets excluding stock-in-hand and prepaid
expenses are called liquid assets.
f. Wasting Assets: These are the assets which are exhausted
with, or which lose themselves in, the goods they produce.
Mines and quarries are common examples of such assets.
Copyright, patents, trademarks, etc. are also classified as
wasting assets since they get exhausted with the lapse of
time.
Fixed Assets

These are those assets, which are acquired for relatively long
periods for carrying on the business of the enterprise. Such
assets are not meant for resale. For example, Land and Building,
Plant and Machinery, etc. Current assets provide benefits to the
organization by their exchange into cash. In the case of fixed
assets, value addition arises by facilitating the process of
production or trade.
All man made things have limited life. In accounting, we are
concerned with the useful life of the assets. Useful life is the
period for which a fixed asset could be economically used.
Benefits from the fixed assets will flow to the organization
throughout its useful life.
Valuation of the fixed assets is usually made on the basis of
original cost. However, since the assets have the limited life the
cost will be expiring with the expiration of the life. Thus, valuation
of the asset is reduced proportionate to the expired life of the
asset. Such expired cost is known as depreciation.
Example: Suppose a trader buys a delivery van at a cost of Rs.
50,000. Assume that the van will have to be discarded as junk at
the end of five years. In this case we take a depreciation of Rs.
10,000 per year and the process of providing depreciation for
each year will continue. At the end of the fifth year the valuation
of the asset will be zero. The value of the assets at cost is usually
referred to as gross fixed assets and the amount of depreciation
to date as accumulated depreciation. Net value of the asset is
usually referred to as net fixed assets.
Fixed assets normally include assets such as land, building, plant,
machinery, etc. All these items, with exception of land, are
depreciated. Land is not subject to depreciate and hence shown
separately from other fixed assets.

Accrued Liabilities

Accrued liabilities represents expenses or obligations incurred in

the previous accounting period but the payment for the same will
be made in the next period. In many cases where payments are
made periodically, such as wages, rent and similar items, the last
month’s payment many appear as accrued liabilities (especially if
the practice is to pay the same on the first working day of a
month). This obligation shown on the balance sheet indicates that
the firm owed the said amount on the balance sheet date.

Contingent Liability
These are liabilities which will exist or not, will depend on any
future incident. For the sake of shareholders’, it is shown in the
footnote in the Balance Sheet. The items, which may come under
this sub-heading, are:
i. Claims against company, which are still not accepted by the
company.
ii. Liability for amount uncalled on partly paid shares.
iii. Arrears of fixed cumulative dividends.
iv.Estimated amount of incomplete contracts (capital
expenditures), arrangement of which is not made.
Other contingent liability. For example, liability for bill discounted,
disputed liabilities or claim, etc.

Accounts Receivables

Accounts receivables are amounts owed to the company by

debtors. This is the reason why we also use the term sundry
debtors to denote the amounts owed to the firm. This represents
amounts usually arising out of normal commercial transactions.
In other words, ‘accounts receivable’ or sundry debtors
represents unpaid customer accounts. These are also known as
trade receivables, since they arise out of normal trading
transactions. Trade receivables arise directly from credit sales
and as such provide an important information for management
and outsiders. In most situations these accounts are unsecured
and have only the personal security of the customer.
It is normal that some of these accounts default and become
uncollectible. These collection losses are called bad debts. It is
not possible for the management to know exactly which accounts
and what amount will not collected. However, based on past
experience, it is possible for the management to estimate the loss
on the receivables or sundry debtors as a whole. Such estimates
reduce the gross value of account receivable to their estimated
realizable value. For example:
Rs.
Accounts Receivable 6,00,000
Less: Estimated collection loss at30,000
5%
Net realizable value of accounts5,70,000
receivable
The estimated collection loss is variously referred to reserve for
doubtful debts, reserve for bad debts or reserve for collection
losses. It is also not an uncommon practice to refer to this as a
provision instead of reserve.
It is a usual practice for debts to be evidenced by formal written
promises to pay or acceptance of an order to pay. These formal
documentary debts represent Promissory Notes Receivable or
Bills Receivable. These instruments used in trade are negotiable
instruments and hence enable the trader to assign any of his
receivables to another party or a bank for realizing immediate
liquidity.
It is also usual for account receivables to be pledged or assigned
mostly to banks against short-term credits in the form of cash
credits or overdrafts.