1. Balance Sheet — Meaning
A Balance Sheet is a statement (not an account) showing the financial position of the business as on a specific date. It lists all Assets owned by the business and all Liabilities (including Owner's Capital) owed by the business.
Key Formula — Accounting Equation: Assets = Capital + Liabilities
The two sides of the Balance Sheet must always be equal.
The two sides of the Balance Sheet must always be equal.
The Balance Sheet is NOT an account — it does NOT have Dr./Cr. entries. It is a position statement prepared on a specific date.
2. Format of Balance Sheet
Horizontal / Traditional Format (T-format)
| Liabilities (Capital Side) | Assets Side |
|---|---|
| Capital (+ Net Profit – Drawings) | Fixed Assets (Land, Building, Machinery) |
| Long-term Liabilities (Loans) | Investments |
| Current Liabilities (Creditors, Bills Payable, Outstanding Expenses) | Current Assets (Stock, Debtors, Prepaid, Cash/Bank) |
Vertical Format
Commonly used in modern company accounts:
- Shareholders' Funds (Capital + Reserves)
- Non-Current Liabilities
- Current Liabilities
- Total Equity and Liabilities = Non-Current Assets + Current Assets
3. Marshalling of Assets and Liabilities
Marshalling refers to the arrangement/order in which assets and liabilities are presented in the Balance Sheet.
| Basis | Order of Liquidity | Order of Permanence |
|---|---|---|
| Assets arranged from | Most liquid → Least liquid (Cash first → Fixed Assets last) |
Most permanent → Least permanent (Fixed Assets first → Cash last) |
| Liabilities arranged from | Most payable first → Capital last | Capital first → Current Liabilities last |
| Common in | Banking/Financial institutions | Sole proprietorships, partnerships |
4. Classification of Assets
| Type | Description | Examples |
|---|---|---|
| Fixed Assets (Non-Current) | Long-term, not for resale, used in business | Land, Building, Machinery, Furniture, Vehicles, Goodwill, Patents |
| Investments | Long-term financial investments | Shares, Debentures, Fixed Deposits (>1 year) |
| Current Assets | Converted to cash within 1 year / normal operating cycle | Stock, Debtors, Bills Receivable, Prepaid, Cash, Bank, Accrued Income |
| Fictitious Assets | Losses/deferred expenses shown as assets to be written off over time | Preliminary Expenses, Discount on issue of shares, P&L Dr. balance (net loss) |
5. Classification of Liabilities
| Type | Description | Examples |
|---|---|---|
| Capital | Owner's equity (Opening Capital ± adjustments) | Capital + Net Profit – Net Loss – Drawings + Interest on Capital – Interest on Drawings |
| Long-term Liabilities | Payable after more than 1 year | Long-term Loans, Debentures, Bank Term Loans |
| Current Liabilities | Payable within 1 year / operating cycle | Creditors, Bills Payable, Outstanding Expenses, Bank Overdraft, Income received in advance |
| Contingent Liabilities | Possible future liabilities — uncertain (shown in notes, not in BS) | Pending lawsuit, Guarantees given |
6. Key Points on Adjustments in Balance Sheet
- Outstanding Expenses: Add to expense (P&L Dr.) + Show as Current Liability in BS.
- Prepaid Expenses: Deduct from expense (P&L Dr.) + Show as Current Asset in BS.
- Accrued Income: Add to income (P&L Cr.) + Show as Current Asset in BS.
- Deferred Income: Deduct from income (P&L Cr.) + Show as Current Liability in BS.
- Depreciation: Add to P&L Dr. + Deduct from asset in BS.
- Bad Debts & Provision: Add Bad Debts to P&L Dr.; create Provision (deducted from Debtors in BS).
- Drawings: Deducted from Capital in Balance Sheet.
- Goods taken by proprietor for personal use (Drawings in kind): Dr. Drawings A/c, Cr. Purchases A/c — deducted from capital and from purchases.
Adjusted Capital formula: Closing Capital = Opening Capital + Net Profit – Drawings
+ Additional Capital Introduced