Concepts and contents for balance sheet

Concepts for Balance Sheet Preparation
and Its Contents
Financial Accounting

Balance Sheet
Meaning
A Balance Sheet is one of the financial statements. A Balance Sheet
is a statement of assets and liabilities of an enterprise at a given
date. It is also called Statement of Financial Position.
4 April 2015 Financial Accounting 2

Features of Balance Sheet
• A balance sheet is only a statement and not an account. It has
no debit side or credit side. The headings of the two sides are
‘Assets’ and ‘Liabilities’.
• It is prepared at a particular point of time and not for a
particular period. The information contained in it is true only at
the particular point of time at which it is prepared.
• It is a summary of balances of those ledger accounts which have
not been closed by transfer to the Trading and P & L Account.
• It shows the nature and value of assets and the nature and the
amount of liabilities at a given date.

Need of Balance Sheet
• To ascertain the nature and value of assets of a business.
• To ascertain the nature and amount of liabilities of a business.
• To find out the financial solvency of an enterprise. An enterprise
is considered to be a solvent if its assets exceed its external
liabilities.

Reliance-
Chairman’s
Statement
(Source: Annual Report)

Sample of Horizontal Format

1. The Entity Concept
1. Business enterprise is a separate identity apart from its owners.
2. Business is distinct from owners.
3. Business transactions are recorded
in business books of accounts and
owner’s transactions in his personal
books of accounts.
4. The examples of entity includes proprietorship firm, partnership firm,
limited liability company, trusts, clubs, societies, private limited
companies, and public limited companies.

1. The Entity concept
5. Enterprise is liable to the owner for the money contributed/given to the
enterprise for doing business.
6. Since owner invested capital in the enterprise and takes risk he has claim
on profits of the enterprise also.
7. Obligation of enterprise towards owner is shown as below in the Balance
Sheet.
Balance Sheet (Proprietary Firm)
Liabilities Assets
Capital
(-) Drawings
(+) Profit
(-) Loss
Balance Sheet (Company)
Equities and Liabilities
Shareholders’ Funds
(a.) Share Capital
(b.) Reserves & Surplus

2. Money Measurement Concept
1. Only those transactions that can be measured in terms of money are
recorded in books of accounts.
2. Measuring unit for money is taken as the currency of the ruling country.
3. It is based on implicit assumption that purchasing power of money is not
of sufficient importance as to require adjustment.
4. Many material events and transactions are not recorded in the books of
accounts just because it cannot be measured in monetary terms.

3. Going Concern Concept
1. The business will continue in operation for the foreseeable future.
2. It is believed that enterprise has neither the intention nor the need to close
down the business or liquidate the business.
3. By virtue of this concept increase/decrease in the value of assets in the
short run is ignored.

4. Cost Concept
1. The value of the non current asset is to be determined on the basis of
original cost incurred by the company to purchase and bring the asset in
the working condition for its intended use. This cost is known as ‘Historic
Cost’.
2. Non current assets are booked at historical cost when acquired and
gradually in a systematic manner part of the cost is reduced due to
amortization. Reduced portion of cost is generally known as depreciation.
For Example -
Balance Sheet
Liabilities Assets
Plant & Machinery (cost)
Less: Depreciation
Book value

Accounting Convention - Godrej

5. The Dual – Aspect Concept
 Every transaction affects at least two items of accounting records known as
dual impact of transaction.
 Accounting systems are set up so as to record both of these impacts of a
transaction preserving the equality of accounting equation.
 Accounts are prepared on double entry system.

Contents of Balance Sheet

Basic Accounting Terms
1. Transaction – Events that affect the numbers
in an entity’s accounting records are called
transactions. It involves transfer of money
or money’s worth.
2. Entity – An entity means an economic unit that
performs economic activities (e.g. TESCO,
TELCO, Birla Industries, Reliance Industries,
Bajaj Auto, Raymond).
3. Entry – Entry is the record made in the books
of accounts in respect of a transaction or event.
An entry is passed on the basis of vouchers.

Basic Accounting Terms
4. Voucher – Voucher is a document which serves as an evidence of a
transaction. For example, in case of cash purchases, cash memos and in
case of credit purchases, purchase invoice are vouchers.

Equity is the residual interest of owners in the assets of the entity after
deducting all its liabilities. It is also called Shareholders’ Fund or Capital.
Liability is a present obligation of the arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.
Shareholders’ Funds
(a) Share Capital - It is the amount
contributed by the shareholders towards
the company’s capital and is entered in
the company’s share capital account.
Items of B/S: Equity & Liabilities

(b) Reserves and Surplus –
It is a profit achieved by a company where a
certain amount of it is put back into the business
which can help the business in their rainy days.
Items of B/S - Equity & Liabilities

Those obligations that do not meet the criteria for being classified as current
liabilities are simply called non-current liabilities. For e.g. Mortgage, bonds and
long term leases etc.
(a) Long-Term Borrowings – Loans taken for a time period exceeding 12
months are classified as long term borrowings.
(b) Deferred Tax Liabilities - The tax effect of taxable
temporary differences is recognized as deferred tax liabilities
which are payable beyond 1 year period.
(c) Long-Term Provisions – It includes Provision for Employee Benefits.
Items of B/S – Non-Current Liabilities

These are normally paid by using existing current
assets, creating other current liabilities or fulfilling
contractual obligations to provide goods or services.
E.g. Bills Payables, Trade Payables, Bank Overdraft etc.
(a) Short-Term Borrowings – It includes Loans repayable on demand from
banks and other loans payable within duration of 12 months like commercial
papers.
(b) Trade Payables - The trade payables show the amounts owed to suppliers
for purchases of goods and services on credit.
Items of B/S – Current Liabilities

(c) Other Current Liabilities – It may include advances from customers and
other short term obligations of the company.
(d) Short-Term Provisions – Provision for Employee Benefits, Proposed
Dividend, Provision for Tax on Distributed Profit.
Items of B/S – Current Liabilities

An asset is a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the
entity.
For e.g. Land, Building, Machinery, Equipment etc.
Items of B/S - Assets

(a) Fixed Asset - A fixed asset is an asset held with the intention of being
used for the purpose of producing or supplying goods or
services and is not held for sale in the normal course of business.
 Tangible Fixed Assets – These have physical existence and can be seen
and felt. For e.g. Land, Buildings, Furniture, Equipment etc.
 Intangible Fixed Assets – These are an identifiable non-monetary assets,
without physical substance, held for use in the production or supply of
goods or services, for rental to others, or for administrative
purposes. For e.g. Brand Names, Copyrights,
Goodwill, Patent etc.
Items of B/S – Non-Current Assets

 Capital Work-In-Progress – It is referred to as assets under construction
that is not considered to be final product but must still be accounted for
because funds have been invested towards its production.
(b) Non-Current Investments – It is the investment which is for long period
and not releasable for current period. For e.g. investment in equity
instruments (subsidiary companies, associate companies), joint venture and in
preference shares and in partnership firm.

(c) Long-Term Loans and Advances –
It includes secured and unsecured loans and
advances with a duration of more than 12 months.
(d) Other Non-Current Assets –
It includes secured and unsecured interest accrued on loans.

Cash and other assets that are expected to be
realized in cash or sold or consumed during
the normal operating cycle of the entity or within
one year, whichever is longer, are called current assets.
(a) Current Investment – A current investment that is by its nature readily
realisable and is intended to be held for not
more than one year from the date on which
such investment is made.
For e.g. Investment in Mutual Funds.
Items of B/S – Current Assets

(b) Inventories – Inventories are assets which held
for sale in the ordinary course of business; in the process
of production for such sale or in the form of materials or
supplies to be consumed in the production process
or in the rendering of services.
(c) Trade Receivables – It includes the amounts receivable from customers for
sales of goods or services on credit.
(d) Cash and Bank Balances – It shows receipts and payments of cash. Cash
includes coins, currency, cheques and amounts deposited in banks.

(e) Short-Term Loans and Advances – It includes loans and advances like
loans to employees, advances to suppliers, loans and advances to subsidiary
and associate companies etc.
(f) Other Current Assets – It includes interest accrued on loans and deposits
and other receivables.

Concepts and contents for balance sheet

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