Page 177 - DMGT104_FINANCIAL_ACCOUNTING

Unit 8: Financial Statements

he prepares a statement which is called the Balance Sheet. The Balance Sheet depicts the financial Notes
position of the business on a fixed date. 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 & Loss Account. A Balance Sheet has two sides – assets
side and liabilities side. The assets and liabilities are shown in a particular order.
Asset = Liabilities + Capital

Definition of Balance Sheet

1. “The Balance Sheet is a statement at a given date showing on one side the traders’ property
and possessions and on the other hand his liabilities”.

—Palmer
2. “Balance Sheet is a screen picture of the financial position of a business at a certain moment.”
—R. Stead
3. “Balance Sheet is 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”.
—American Institute of Certified Public Accountants

Presentation of a Balance Sheet

As the Trading and Profit & Loss account can be presented in two forms namely (1) Horizontal/
Traditional form and (2) Vertical form (New, Recent development, Latest), similar is the case of
Balance Sheet, this can be presented either (1) Horizontal form or (2) vertical or single column
form. As we know, Balance sheet is prepared with a view to depict, the financial position of a
business concern that too on a particular date, it is better if it portrays the full and complete
information about financial soundness of the business. Under (1) Horizontal form, the Balance
Sheet depicts the assets on the right hand side of the Balance sheet, whereas the assets are
properly classified and shown such as (a) Fixed Assets (b) Investments (c) Current assets
(d) Miscellaneous assets and the liabilities are shown on the left hand side of the Balance Sheet
whereas liabilities are shown separately such as (i) Owned funds (ii) Borrowed funds i.e. funds
borrowed from outsider that too long-term or short-term.
The Balance sheet is a document or a statement which tells how the funds are collected i.e.
(1) Management of raising Funds and (2) How these are utilized i.e. Management of working
capital and fixed assets. So it is necessary that the following information is supplied by the
balance sheet.
(i) All the fixed assets must be shown as cost i.e. original costs and if depreciation is provided,
it must be shown by way of deduction, if there is a change in the method of showing assets,
it must be stated clearly.
(ii) As far as closing stock is concerned, it must be valued at cost or market value whichever is
less.
(iii) Valuation of Investments–Cost as well as market value be given separately.
(iv) Book debts must be shown on book value and if any provision is made, this fact must be
clearly stated. If there are some doubtful debts which are not provided, should be given
separately.

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