Internal Assignment

1. What is accounting users? Give details

Answer:

Accounting information has both internal and external users. Internal users are managers in all
areas of functional responsibility such as marketing, finance, human resources and general
management.

External users of accounting information include investors, lenders, customers, suppliers, labor
unions and the government.

Owners and investors are interested in knowing whether the business would be able to
provide a reasonable return on their investment and whether to continue with the
investment in the business, how to finance the expansion of business, etc.

2. What is Balance Sheet and it’ elements

Answer:

The balance sheet reports the financial position of the business at a particular point of time,
generally at the end of the accounting period. It shows the amount of assets owned by the
business and the claims on these assets. The claims on the assets belong to the providers of
resources to buy the assets, i.e., the owners and creditors/lenders. As the business cannot
spend more on buying assets than the resources it has, the following relationship (also called
the accounting equation) always holds.

Assets = Owners’ Capital + Liabilities

A balance sheet reveals the financial position of an entity. It sets out the assets, liabilities and
owners’ capital of an entity as on a certain date. Assets are economic resources controlled by an entity
which provide future cash flows to the entity.

Balance sheet is useful to both investors and lenders. Investors analyze the balance sheet to form an
opinion about the financial strength of the business. Lenders use the balance sheet to understand the
capacity of the entity to repay the borrowed money.
Balance sheet of a typical non-corporate entity in horizontal form

In the vertical form of the balance sheet, capital and liabilities are listed at the top. The vertical form of the
balance sheet given in Table 3.1 is presented in Table 3.2.

The various elements of the balance sheet are explained in the next section

ASSETS

FIXED ASSETS (NON-CURRENT ASSETS)

 INVESTMENTS
Investments refer to money invested outside the business in the form of shares, bonds or other
instruments.

CURRENT ASSETS
Current assets are either in the form of cash or are meant to be converted into cash or other
current assets during the accounting period or the operat- ing cycle of the business, whichever
is longer.

LIABILITIES

The liabilities to outsiders can either be short term or long term.

3 LONG-TERM LIABILITIES
Long-term liabilities include borrowings from banks or financial institutions for a period of more
than one year.

SHORT-TERM LIABILITIES
Short-term or current liabilities are those that must be settled within one year, for example,
creditors (accounts payable), outstanding expenses, etc.

OWNERS’ CAPITAL OR OWNERS’ EQUITY

For a non-corporate entity, owners’ capital consists of the capital originally contributed by the
owner and adjusted for subsequent profits/losses and drawings (withdrawals of money or
goods by owners for their personal use).