a

FIHANCIAL ACCOUNTING

.;,Bolcnce Sheer
5:rle a;: ihe nominai accounts of a trial balance are closed bl,transferring either Balance S

\::."r'ac'ltj!-rnB Acco.unt or to Trading and Profit and l-oss Account,

there remain, tf," p*rr"- (i) AB
a::C real accounts of the trial l-ralance, Now, the Balance Sheet exhi
is preparecl by taking up aii -
irt'sorai accounts (Capital and Drarvings) and real accounts (assets and piopertie"st toge:-. posi
""::i the net resttlt obtained from Profit and Loss Account showing the debit balance on the rrr- (ii) A Bi
nand side rcalied Assets side) and credit [:alance on the left hanJside (caiied of tl
fiabilitles sLe
crder io shorv the reai financiai position of a firm at a particular date. Thus. appl
a Balance Shee:
not an accouni but it is a statement prepared from the balances of accounts. practically.
Dalances do not transfer to the Balance Sheet but they simply remain
:, iiii) Som
in the accounis rnior
acoearing as the openrng balance in the next year.
vviih
The ieft hand side (i.e., the Liabilities side) of the BaJance Sheet represents iv)
the sources irr- : Ba !a
rvhich the funds of a firm have been obtained and the right hand side (i.e.,
the Assets sicie)of :- depr
Balance Sheet shows the rvays in which these funds are"used. Funds may
be procured from:--
owners rvho invest resources and also fror,routsiclers who advance resources
rn any other *.
rvhich. in other rvords. presents a ciassification of source of funcis into proprietor,s
(v) Som
funds a. inrpr
external iiabilities. At the same time, the uses of'lhese funds express the property
r"inil acquired, i.e. the Assets.
that a btisine- (vi) Som

The Balance Sheet is a sophisticated reoort which serves as a valuable source

ivii) Va lu
of informaii,: esti n
to the users of financial statements, r,iz. the olvners and outsiders. lt presenrs
in a summary for* true
of a picture uncluttered by detail, the iinancial position of the business at a partictrlar
gives us a good idea abcut the iinanciaiposition of a business unit
date viii) Whe
if we analyse, scrrrtrnrse a. con\
interpret the assets and liabilities at a parttcLriar date.
va r.ic

feed/Functions of Bslqnce Sheet (ix) Bala

jihe functrons of ba lance sheet are: infor
requ
i lt) A Balance Sheet exhibits the true financial positron of a firm by shou,ing the assets .
resources) and liabiiities (i.e. obligations) ai a particLrlar ciate to lhe orvn"er
ti ix) A co
as iyell as:, thror
lhe outstders,
3rofit and Losr
(i i) lt helps the int'estor to knor.v the earning capacity of the firm and rhe dividend pa),-c,
ratio. --e iundar-nen

i (iii) lt also provides valuabie infornraljon about the existence of the firm after
scrutinisir:: Pr,
some financiai ratios to the crerJitors ancl investors by rvhich they can take propc. A Profit &
decisron(s). of the und
(iv) lt also highiights the financial strength of the firm to the creditors so that they ca: It takes all
revierv the repaying capacity after analysing some ratios (e.g. Debt-Equiry
Ratic It is itself a
Current Ratio etc.)
All the n
(v) A detailed financial position can be knorvn if we analyse ancJ scrr-rtinise the assets anc $Ansferrinl
Iiabilities at a particular date. these accc
From the above. it becomes clear that a Balance Sheet is a very important :. The
tool of financia, diflerr
statement to the users of accounting information; primarily to the creditors, investors represents
and the
shareholders, But it must be remembered that a single Balance Sheet for a particular
at ail sufficient for the purpose. 1-he analysis of Bala-nce Sheet will be significant
year is rroi 5. The le*
and meaningtLri Account i
only when a. ccmparative study (at least 5 years, data) can be made n,hich rvill, no doubi,
hand side
present va lirable information.

f E:r. Ace.- l3l

=lffi
 I

FIilIAL ACCOUNTS
]:
: principle is followed. The outline of the Balance Sheet under Rigidity Fr"eference Nlethod is
:i:
presented below.
or the,,
Under Permanence or Rigidity Preference Method
m, the
Balance Sheet as a1,....,....""
i hand
Liabilities
CapitalAccounts: Fixed Assets:
Capital Accounts Coodwill
Current Accounts Land and Building
Long{errn Liabil ities: Plant and Machinery
Debentures Furniture
ray'be
Loan on Mortgage lnvestments {with details)
:ren{ a
Current Liabilities: Current AsseB:
Bank Overdraft Stock-in-Trade
s (e.g-.
Sundry Creditors Sundry Debtors
ts (e.8.
,eei. l* Outstanding Expenses Prepaid Expenses
; (e.8., lncome Received in Advance Accrued Income
if an'o. Bills Payabie Bills Receivable

( ,,-
..,Cash +
,*Cash at Bank f
\
r .,:
/- lllustration 6.11
-\&.
\s:
qGr+
:

From the following particulars prepare a Balance Sheet as at 3't.12.20G8 {i} is per Rigidity
N Preference Method, (ii) Liquidity Preference me&od:

V. , Capital {1.1.04) Rs.50.00O; Drawings Rs.3,000; Net Profit for the year Rs. 15,000;
,{}osing Stock Rs.6,000; Loan on Mortgage Rs.7,500; Bills.Payable Rs.2,500; Bills Receivable
. Rs. 4,000; Coodwill Rs. 6,000; Book-Debts Rs. 9,000; Creditars Rs. 3,000; Plant and Machinery
,.,Rs. 20,000; lnvestments Rs.9,000; Cash in hand Rs. 1,000; Cash at Bank Rs. 3,000; Land and
Suilding Rs. '17,000.
tolution
(i) Rigidity Preference Method:
!n the books of ............
Balance Sheel
as at 3lst December 2008
Liabilities
{apital Account Fixed Assets
Capital Coodwill 6,000
ddd: Net Profit Land and Building 17,000
Plant and Machinery 20,0o0
{ess: Drawings lnvestment 9,0O0

c.-
iont-term Liabilities: Current Asseb
Loan on 6,000
Crrtd.