Professional Documents
Culture Documents
Submitted by;
Sincy Mathew
Institute of Management and Technology, Punnapra
TASK 10
Prepare balance sheet of the company
Learnovate Company Pvt Ltd as on 31-12-2020
492100 472100
Explain what is balancesheet and what is the use of balancesheet for a company?
Balance Sheet is the financial statement of a company which includes assets, liabilities, equity
capital, total debt, etc. at a point in time. Balance sheet includes assets on one side, and liabilities on the
other. For the balance sheet to reflect the true picture, both heads (liabilities & assets) should tally (Assets
= Liabilities + Equity).
A balance sheet should always balance. The name "balance sheet" is based on the fact
that assets will equal liabilities and shareholders' equity every time. The assets on the balance
sheet consist of what a company owns or will receive in the future and which are measurable.
Liabilities are what a company owes, such as taxes, payables, salaries, and debt. The
shareholders' equity section displays the company's retained earnings and the capital that has
been contributed by shareholders. For the balance sheet to balance, total assets should equal the
total of liabilities and shareholders' equity.
The major reason that a balance sheet balances are the accounting principle of double entry. This
accounting system records all transactions in at least two different accounts, and therefore also
acts as a check to make sure the entries are consistent.
Building on the previous example, suppose you decided to sell your car for $10,000. In this case,
your asset account will decrease by $10,000 while your cash account, or account receivable, will
increase by $10,000 so that everything continues to balance.
Before I jump in to Paid in Capital mistakes, I just wanted to make sure that you understand
the basics of a balance sheet. At the end of the day, in order for your balance sheet to balance,
you need your Assets to equal your Liabilities plus your Owner’s Equity. Paid in capital is an
owner’s equity account. The definition of paid in capital is “the capital contributed to a
corporation by investors through purchase of stock from the corporation.” For most small
businesses Paid in Capital is the amount of cash you personally invested in the business to get it
started. You may have had other investors as well when you started, their investment plus your
investment should be the total of Paid in Capital.
3. Change in Inventory –
Another common mistake that impacts the balance sheet is a change in inventory. You
would think that it should be pretty simple. It is easy to determine how much inventory you have
right now because you can just go make a physical count, but if you are working on a set of
financial projections you will need to project future inventory amounts, and this will impact your
balance sheet each month. The trick is that a change in inventory also impacts your cash flow
statement, you actually have to take last month’s inventory and subtract this month’s inventory
and then reduce your cash balance by that amount.
4. Retained Earnings –
Retained earnings is kind of a catch all. Retained earnings is supposed to be the sum of
all your net income or net loss from the day you started your business. So if you were doing
things right from the beginning you should be able to calculate retained earnings, but what I
often see with small businesses is that they don’t have all the data needed to calculate retained
earnings, so they just use Retained Earnings as a plug number. They make retained earnings
whatever it needs to be in order for the balance sheet to balance. I am not suggesting that you do
this, but just know that it is not an uncommon practice.
Off-balance sheet (OBS) assets are assets that don't appear on the balance sheet. OBS
assets can be used to shelter financial statements from asset ownership and related debt.
Common OBS assets include accounts receivable, leaseback agreements, and operating leases.