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Balance Sheet

A balance sheet is prepared from the trial balance after all the nominal accounts and accounts relating to goods – purchases account, sales account, returns inwards and returns outwards accounts – have been closed by transfer to Trading and Profit and Loss Account. The trial balance is now left with only a few ‘open’ accounts which represent either Real Accounts or Personal Accounts. There will be certain other newly opened accounts as well on account of adjustment entries, e.g., outstanding expenses or accrued income or accounts relating to deferred revenue expenditure. Some of these open accounts may have debit balance and other credit balances. A debit balances in a real account or a personal account represents an asset. A credit balance in a personal account is called a liability. All such assets and liabilities are shown in the balance sheet. It is divided, when prepared in a T – account form, into two halves. The liabilities are placed on the left-hand side and the assets on the right hand side. Thus, the balances of all personal and real accounts are shown in the balance sheet on the side opposite to that on which they appear in the trail balance – the debit balances on the right – hand and the credit balances on the left-hand side. The total of the two sides must show equal amounts. The balance sheet, therefore, may be described as a classified summary of debit and credit balances existing in the trial balance (or ledger) after the trading and profit and loss account ahs been prepared.

Assets are things owned by the business such as building, machinery, the money owed to t by debtors or its balance at bank. Liabilities are amounts owed such as money owed to creditors for goods and money or its bank overdraft.

The capital account(s) that represents liability to the owner(s) is shown in the liabilities side and the net profit is added to and net loss deducted fro it.

The debit balance in the drawings account (that represent proprietor(s)’s temporary debit to the business) is not shown as a separate item in the assets side. Instead, drawing accounts is shown as a deduction from the capital account.

A balance sheet is not an account in the ledger and thus it has no debit and credit sides, nor are the items preceded by the words “To” and “By”.

The equality of amount in the asset side and liabilities side is a proof of arithmetical accuracy of the adjustments made for the purpose o the final accounts.

The purpose of a balance sheet is to show the financial position of a business enterprise on a specific date. It has therefore been likened to a snapshot of a business: It shows the assets and liabilities at a particular moment in time, that is, the financial position is not the same either prior or subsequent to the particular date of the balance sheet. This is why the balance sheet has the heading: Balance Sheet As At …… as against the heading of Trading Account and Profit and Loss Account (or Trading and Profit and Loss Account) which usually covers a year of business activity. Unlike trading and profit and loss account a balance sheet is not a part of the double entry book keeping system. A balance sheet should provide information n respect of: (i) the nature and cost (or book value) of the assets; (ii) the nature and amount of liabilities; (iii) the amount of capital; (iv) whether the firm is solvent and (v) whether the firm is overtrading.

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