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Balance Sheet

Balance Sheet

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Lesson-9
Balance Sheet
Learning Objectives
\u2022
To understand the meaning of balance sheet
\u2022
To know the method of preparing a balance sheet
\u2022
To know the difference between profit and loss account and balance sheet
\u2022
To know the relationship between profit and loss account and balance sheet
Balance Sheet

The American Institute of Certified Public Accountants defines balance sheet as \u201ca tabular statement of summary of balances (debits and credits) carried forward after an actual and constructive closing of books of account and kept according to the principles of accounting.\u201d The purpose of balance sheet is to show the resources that the company has, i.e. its assets, and from where those resources come from, i.e. its liabilities and investments by owners and outsiders.

The balance sheet is one of the important statements depicting the financial strength of the company. On one hand, it shows the properties which were utilized and on the other, the sources of those properties. The balance sheet shows all the assets owned by the company and all the liabilities and claims it owes to owners and outsiders. The balance sheet is prepared on a particular date. The right hand side shows properties and assets. Usually, there is no particular sequence for showing various assets and liabilities. The Companies Act, 1956 has prescribed a particular form for showing assets and liabilities in the balance sheet for companies registered under this act. These companies are also required to give figures for the previous year along with the current year\u2019s figures.

Form and Contents of Balance Sheet

There is no specific way to prepare balance sheet in the case of proprietary concerns and partnership firms. The balance sheet is generally divided into parts, i.e. assets, liabilities and capital. It is usually prepared in the horizontal form. The assets are shown on the right hand side and capital and liabilities on the left hand side. The order of assets and liabilities is either on liquidity basis or on permanency basis. When balance sheet is prepared on liquidity basis, large liquid assets like cash in hand, cast at bank, investments etc. are shown first and small liquid assets later. On liabilities side, the liabilities to be paid in the short period are shown first, long-term liabilities next and capital in the last.

The liquidity form is suitable for banking and other financial companies. When balance sheet prepared on permanency basis, on assets side, fixed assets are shown first and liquid assets later. On liabilities side, the capital is shown first, long-term liabilities next, and short-term and current liabilities in the last.

The Companies Act has adopted permanency form for preparing balance sheet. The act has prescribed a form for the preparation of balance sheet. This form is set out in Part I of Schedule VI or as near thereto as circumstances admit. Section 211 (i) states that

77

every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of the sections, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit or in such other form as may be approved by the Central Government either generally or in particular case; and in preparing the balance sheet due regard shall be had, as far as may be to be general instructions for preparation of balance sheet under the heading \u201cNotes\u201d at the end of that part.

Schedules

The details of various items are shown separately in schedules. It incorporates all the information required under Part I A of Schedule VI. The schedules, accounting policies and other explanatory notes will form part of the balance sheet.

A number of schedules are prepared to supplement the information supplied in the balance sheet. The schedules of investments, fixed assets, debtors etc. are prepared to give details about these transactions. A banking company may prepare a detailed schedule of advances so as to supplement the balance sheet information. All these schedules are used as part of financial statements.

Explanation of Balance Sheet Items
1. Share Capital

Share capital is the first item on the liabilities side of a balance sheet. Authorized and issued capital is shown giving the number of shares and their amount. The number of shares for which public has applied (subscribed capital) are mentioned along with the type of capital, i.e. preference share capital and equity share capital. If the capital is issued for other than cash, the amount of such capital is mentioned. The fact of issue of bonus share is also mentioned. Any unpaid calls are deducted from the called up capital. If forfeited shares are reissued, this amount is added to the paid-up capital.

2. Reserves and Surplus

Under this heading, all those reserves which have been created out of undistributed profits are shown. Reserves are classified as capital reserves and revenue reserves. Capital reserves are the reserves which are not free for distribution as profits whereas revenue reserves are created out of appropriations of profits. Following items are included here:

\u2022
Capital reserves
\u2022
Capital redemption reserve
\u2022
Share premium account
\u2022
Other reserves
\u2022
Surplus, i.e. profit and loss account
\u2022
Proposed additions to reserves
\u2022
Sinking fund
78

The additions and deductions since last balance sheet will be shown under each head. The word \u201cfund\u201d in relation to any reserve should be used only where such reserve is specifically represented by earmarked investments.

3. Secured Loans

All those loans against which securities are given are shown under this category. Debentures are shown under this heading. Loans and advances from bank, subsidiary companies etc. should be shown separately and the nature of securities should also be mentioned.

4. Unsecured Loans

These are the loans and advances against which the company has not given any security. The items included here are deposits, loans and advances from subsidiary companies and loans and advances from other sources. Short-term loans from banks and other sources are also shown in this category. Short-term loans include those which are due for not more than one year on the balance sheet. Loans from directors, managers etc. should be shown separately under different sub-headings. This is done to show regard to them.

5. Current Liabilities and Provisions
These are divided into current liabilities and provisions. In this category, following items
are included:
(a) Current liabilities include the following:
\u2022
Acceptances
\u2022
Sundry creditors
\u2022
Subsidiary companies
\u2022
Advance payments and unexpired discounts
\u2022
Unclaimed dividends
\u2022
Other liabilities, if any
\u2022
Interest accrued but not paid on loans
(b) Following items are included under provisions:
\u2022
Provision for taxation
\u2022
Proposed dividends
\u2022
Provision for contingencies
\u2022
Provision for provident fund scheme
\u2022
Provision for insurance, pension and similar staff benefits schemes
\u2022
Other provisions
Assets Side
The assets are given under the following heads:
1. Fixed Assets
79

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