Page 24 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 2: Understanding Corporate Financial Statements

2.2.2 Balance Sheet Notes

After the determination of the net profit of the business through the Trading and Profit and Loss
Account, the businessman wants to know the financial position of the business. For this purpose

he prepares a statement which is called the Balance Sheet. The Balance Sheet depicts the fi nancial
position of the business on a fixed date. A Balance Sheet is prepared with those balances of Trial

Balance which are left out (personal and real accounts) after taking out the nominal accounts’
balances to prepare the Trading and Profit and Loss Account. A Balance Sheet has two sides –

assets side and liabilities side. The assets and liabilities are shown in a particular order.
Marshalling of Assets and Liabilities

Order of presenting the assets and liabilities in the balance sheet is called marshalling of assets
and liabilities. A balance sheet may be prepared by marshalling the assets and liabilities in the
following orders:

Balance Sheet prepared in Liquidity Order

Here liquidity means conversion of assets into cash. When a Balance Sheet is prepared on the

basis of liquidity order, more easily convertible assets into cash are shown first and those assets
which can not be easily converted into cash are shown later and so on. In the case of liabilities,

first those liabilities are shown which are payable earlier and then those liabilities are shown
which are payable later. The proforma of such a Balance Sheet is given below:
Proforma of Balance Sheet in Order of Liquidity
(as on ………………….. )
Liabilities ` Assets `
Current Liabilities Current Assets ------
Sundry Creditors ------ Cash in Hand
Bank Overdraft ------ Cash at Bank ------
Short-term Loan ----- Short-term Investment ------
Outstanding Expenses ----- Prepaid Expenses ------
Unaccrued Income ----- Bills Receivable ------
Bills Payable ----- Accrued Incomes ------
Long-term Liabilities Debtors ------
Capital ------- Closing Stock ------
(+) Net Profi t ------- Fixed Assets
------- Land & Building -----
(–) Drawings ------- ----- Plant & Machinery -----
Long-term Loans ----- Furniture -----
Contingent Liabilities Investments (Long-term) -----
-------- Goodwill ------
-------- Patents & Trademarks ------
Livestock ------
------- -------

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