Preparation of Financial

Statement: (Balance Sheet)

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 Balance Sheet
• Balance Sheet is a statement of assets and liabilities
of a business organization at any particular date.
• Balance Sheet is prepared from the business point of
view treating it as a separate entity, distinguished from
its owners.
• The registered companies are required to follow Part I
of Schedule VI of Companies Act, 1956 for recording
assets and liabilities in the Balance Sheet.
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 Balance Sheet

 Meaning:
 Balance Sheet is a statement of assets
and liabilities of a business as on a
certain date
 Assets are stated on right hand side
and liabilities on the left hand side, in
case Balance Sheet is prepared
horizontally.

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 Balance Sheet

 If balance sheet is prepared vertically,

assets are mentioned first (Application of
funds) and later the liabilities are mentioned
(Sources of funds)
 The assets and liabilities are arranged in the
liquidity order, i.e.., more liquid assets come
first and those that can not be readily
converted come next.

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 Balance Sheet

 A balance sheet of a company form of

organization, assets and liabilities are
arranged on permanency order, i.e.., assets,
which are more permanent come first and
less permanent next. Format of a Balance
Sheet is a

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 Balance Sheet
BALANCE SHEET OF -- - - - - - - - - - -FOR THE YEAR ENDING - - - - - - - - - -

Capital and Liabilities

Assets
Rs Rs

Sundry Creditors Cash in hand

Less Reserve for Discount on Cash at Bank
Creditors Land and Building
Add Additions if any
Bills Payable Less depreciation
Bank Over Draft Plant and Machinery less depreciation
Loans Borrowed Furniture and Fixtures less depreciation
Outstanding Expenses Sundry debtors
Pre-received Incomes Less Bad debts out side Trial Balance
Capital (Opening) Less Reserve for Bad Debts
Add Additions to capital Less Reserve for discount on Debtors
Bills Receivable
Add interest on capital if any Loans and advances given to others +
Add Net profit as per P&L a/c Interest outstanding
Less personal drawings Investments + outstanding income on
Less Net loss as per P&L A/C investments
Other outstanding incomes
Pre-paid expenses
Closing stock
Accounting for
Total Total
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Linkage Between Trial Balance, Profit &
Loss Account and Balance Sheet
Trial Balance

Items relating to Items relating to

incomes and Adjustments Assets and
Expenses Liabilities

Profit and Loss Double Entry Effect Balance Sheet

Account

Result:
Net Profit or Loss

Transferred to
Balance Sheet

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 Limitations of Balance Sheet

• Balance Sheet is considered to be a static document

and it reflects the position of the concern at a moment
of time.

• Balance Sheet is not a valuation statement. The

values shown in it are not real values of assets.

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 Limitations of Balance Sheet

• Window-dressing of the Balance Sheets gives a better

picture to the share holders, bankers and financial
institutions.

• Window-dressing is accomplished in general ways –

by not making adequate provisions for expenses and potential
losses,
by taking into account income even before its actual accrual,

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 Vertical form of Profit and loss
Account and Balance Sheet

• Now-a-days many organizations publish their profit

and loss account and balance sheet in a vertical form
(as opposed to the traditional `T’ form).

• Many people find it more convenient to use the vertical

format for preparing the financial statements.

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 Analysis of Balance Sheet

• Financial analysis involves the division of facts on the

basis of some definite plans, classifying them into
classes on the basis of certain conditions and
presenting them in the most convenient, simple and
understandable form.

• A clear and correct understanding of the basic

divisions of the balance sheet is very essential for the
proper analysis and interpretation of the financial
statements.
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 Analysis of Balance Sheet
• The various items of the balance sheet may be
grouped as under:
• Fixed Assets
• Current Assets
• Intangible Assets
• Other Assets
• Deferred Expenditures
• Net Worth
• Non-Current Liabilities
• Current Liabilities
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 Adjustments with respect to the
preparation of Financial statements

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 Adjustment Treatment Reasons

1. Closing Stock
a. If it is given as an i.Credit Profit & Loss Since it is an
adjustment (not included Account. adjustment double
in trial balance). ii.Show as Current Asset effect is to be given as
in Balance Sheet per double entry
concept.
b. If it is shown as debit Show only as a current It is included in Trial
balance in Trial Balance asset in Balance Sheet Balance means it is
already adjusted in
cost of goods sold.
c. If market value of stock Take cost or market value
is also given whichever is less.

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 Adjustment Treatment Reasons

2 Bad debts recovered Credit to profit and loss Since it is debited to

account profit and loss
account in the year of
occurrence, it should
be taken as income in
the year of recovery.
3 Live Stock Show as fixed asset in As per Schedule VI of
Balance Sheet the Companies Act.
4 Investments Cost value is to be shown Market value is to be
in the Balance Sheet shown in the inner
column for
information (Schedule
VI requirement).

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 Adjustment
5 Income tax provision :
Relating to current year
Relating to previous year
Accounting for
Treatment
Debit to profit & loss
account i.e. above the line.
Show as a current liability
in Balance Sheet
It is a charge against profit
& loss appropriation
account
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Reasons
It is not an
appropriation of
profits
Hence it should be
debited to profit &
loss account.
All previous year
expenses are to be
debited to profit &
loss appropriation
account.
In the same way, all
prior year revenues
are to be credited to
profit & loss
appropriation account.
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 Adjustment
6. Secured loans
Interest due and accrued
Interest due but not accrued
Treatment Reasons
i. Both are to be debited to As per Schedule VI
profit & loss account. of the Companies
ii. Interest due and accrued Act.
is to be added to loan
amount in Balance
Sheet .
iii. Interest due but not
accrued is to be added to
current liabilities in
Balance Sheet

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 Adjustment Treatment Reasons
18. Miscellaneous The following expenses to the extent not written- As per
Expenses off should be presented as miscellaneous Schedule VI.
expenses in the Balance Sheet
i. Preliminary expenses
ii. Expenses including         brokerage,
commission on         underwriting of shares,
        debentures
iii. Discount on issue of          shares/debentures
iv. Interest paid out of capital        during
construction

The total of above expenses          should not

be debited to          profit and loss account,
         whereas they can be          written-off
i.e., debited to          P&L account on a fixed
          percentage basis.

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 Preparation of Balance Sheet

Guidelines to prepare Balance Sheet

1. Check whether the given Trial Balance

tallies or not. If it does not tally, make a note
of the amount of difference.

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 Preparation of Balance Sheet

2. Identify assets from the debit side of

Trial balance and arrange them in
liquidity order on the assets side of B/S
3. Identify liabilities from the credit side of
Trial Balance and arrange them on the
liabilities side of Balance Sheet

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 Preparation of Balance Sheet

4. Note those items of adjustments, which

are given out side Trial Balance.

5. Every adjustment should be recorded at

two places, either Trading account or
Profit and Loss Account and Balance
Sheet. Invariably, an adjustment is
recorded in Balance sheet.

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 Preparation of Balance Sheet

4. Note those items of adjustments, which

are given out side Trial Balance.

5. Every adjustment should be recorded at

two places, either Trading account or
Profit and Loss Account and Balance
Sheet. Invariably, an adjustment is
recorded in Balance sheet.

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 Prepare Balance Sheet from the following Trial Balance
from the books of a merchant on 31-12-2004
Rs
Particulars
Furniture and fittings 640
Motor Vehicles 6250
Buildings 7500
Capital Account 12500
Bad Debts 125
Provision for Bad debts 200
Sundry Debtors 3800
Sundry Creditors 2500
Stock on 1-1-2004 3460
Purchases 5475
Sales 15450
Bank Over Draft 2850
Sales Returns 200
Purchase Returns 125
Advertising 450
Interest on Bank Over Draft 118
Commission 375
Cash 650
Taxes and Insurance Accounting for 1250
General Expenses 782
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Salaries 3300
 The following adjustments are to be made.
 Stock in hand on 31-12-2004 was Rs3250
 Depreciate Buildings at the rate of 5%,
Furniture and fittings @ 10% and Motor
Vehicles @ 20%.
 Rs.85 is due for interest on bank overdraft.
 Salaries of Rs300 and taxes Rs.120 are
outstanding.

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 Insurance amounting to Rs.100 is
prepaid
 One-third of the commission received
is in respect of work to be done next
year
 Write off a further sum of Rs.100 as
bad debts and provision for bad and
doubtful debts to be made equal to
10% on sundry debtors.

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 Preparation of Balance
Solution
Sheet continued
BALANCE SHEET OF THE MERCHANT AS ON 31-12-2004
Rs Assets Rs
Capital and Liabilities
Sundry Creditors 2500 Cash 650
Bank Over Draft 2850 2935 Building 7500 7125
Add interest due 85 125 Less Depreciation 375 576
Furniture and Fixtures 640 5000
Commission received in 120
Less Depreciation 64 3330
advance 300 Motor Vehicle 6250 3250
Outstanding Taxes 14051 Less Depreciation 1250 100
Outstanding Salaries Sundry Debtors 3800
Capital 12500 Less bad debts as per
Add Net Profit 1551 Adjustments 100
Balance 3700

Less Reserve for Bad

Debts(New) 370
Closing Stock
Pre-Paid
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NOTE: Every adjustment given outside
Trial Balance finds place in two accounts
–Trading account / Profit and Loss
Account and invariably in Balance Sheet.

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 Summary

• Balance Sheet is a positional statement that depicts

the assets, liabilities and equity of an organization on
a particular date.

• Balance Sheet is not a valuation statement. The

values shown in it are not real values assets.

• Many organizations publish their profit and loss

account and balance sheet in a vertical form.

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