UNIVERSITY OF MYSORE

GOVERNAMENT FIRST GRADE COLLEGE

KIRISHNARAJAPETE

Accounting Theory

Balance Sheet

Kiran A.S
Government First Grade College K.R Pet

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 FORM OF BALANCE SHEET
INTRODUCTION:

 "It is a statement of assets, liabilities and owner's equity (capital) on a

particular date"
 “Balance sheet is a financial statement that summarizes a company’s assets,
liabilities and shareholders’ equity at a specific point in time”
 "It is a statement of what a business concern owns and what it owes on a
particular date" (What is owns are called assets and what it owes are called
liabilities)
 "It is a statement which discloses total assets, total liabilities and total capital
(owner's equity) of a concern on a particular date"
 "It is a statement where all the ledger account balances which remain open
after the preparation of trading and profit and loss account, find place"
 The balance sheet also called the statement of financial position, is the third
general purpose financial statement prepared during the accounting cycle
 It is also called "position statement"
 Assets = Liabilities + Shareholders equity

TITLES:

 Balance Sheet or General Balance Sheet

 Statement of Financial Position or Condition.
 Statement of Assets and Liabilities.
 Statement of Resources and Liabilities.
 Statement of Assets, Liabilities and Owners Fund etc.

OBJECTIVES:

 Knowing the financial position of a business.

 Knowing the real value of assets.
 Knowing the amount and nature of liabilities.
 Verification of debt paying capability of a business.
 Knowing the trend of changes in assets and liabilities.
 Knowing trend of profit or loss of a business.
 Knowing deduction of depreciation from assets.
 Knowing the amount of prepaid and unpaid expenses.

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FEATURES:

 It is the last stage of final accounts

 It is prepared on the last day of an accounting year.
 It is not an account under the double entry system - it is a statement only.
 It has two sides - left hand side known as asset side and right-hand side
known as liabilities side.
 The balance sheet includes assets and liabilities & owner’s equity.
 Total of assets is equal to the total of liabilities and owner’s equity
 The balances of all asset accounts and liability accounts are shown in it. No
expense accounts and revenue accounts are shown here.
 It discloses the financial position and solvency of the business.
 It is prepared after the preparation of trading and profit and loss account
because the net profit or net loss of a concern is included in it through capital
account
 The balance sheet is not an account. It is a financial statement which is
prepared with ledger balances.

(Ledger balances are not transferred to the balance sheet. These ledger balances
remain as closing balances which are transferred to the next accounting period as
opening ledger balances)

IMPORTANCE:

 It is an important tool used by the investors, creditors and other stakeholders

to understand the financial health of an entity.
 The growth of an organization can be known by comparing the balance sheet
of different years.
 It is an essential document required to be submitted to the bank to obtain a
business loan.
 Stakeholders can understand the business performance and liquidity
position of the entity.

FORMS OF PREPARING BALANCE SHEET:

 Horizontal Form of Balance Sheet

 Vertical Form of Balance Sheet

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HORIZONTAL FORM:

 Horizontal form also called the traditional form, The account form, “T”
Shape form
 The account form consists of two columns displaying assets on the left
column of the report and liabilities and equity on the right column.
 You can think of this like debits and credits. The debit accounts are displayed
on the left and credit accounts are on the right.

Grouping and Marshalling of Assets and Liabilities in Balance Sheet:

 Permanency Preference Method

 Liquidity Preference Method
 Mixed Method

(As we have discussed that the main purpose of balance sheet is to disclose a true
and fair financial position of a business on a particular date. So, the assets and
liabilities must be shown in such a manner that the financial position of the
business can be assessed through it easily and quickly. Thus, an arrangement is
made in which assets and liabilities are shown in the balance sheet. Such an
arrangement is called marshalling of assets and liabilities)

Permanency Preference Method:

 Under this method, the assets and liabilities are shown in balance sheet in
the order of their permanence.
 In other words, the more permanent the assets and liabilities, the earlier are
they shown.
 This method is adopted by joint stock companies and under this method the
balance sheet will take the following form:

Liquidity Preference Method:

 Under this method, assets and liabilities are shown in order of their liquidity.
 The more liquid the assets, the earlier are they shown.
 The sooner the liabilities are to be paid off, the earlier are they shown.
 This method is adopted by sole proprietorship and partnership business.
Under this method the form of balance sheet is:

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 Balance Sheet as at....

Assets $ Liabilities $

Fixed Assets: Fixed Liabilities:

Good will Capital

Patent Reserves
Land Long term loans
Building
Plant & Machinery
Current Liabilities:
Furniture & Fixtures

Sundry creditors
Current Assets:
Bills payable
Bank overdraft
Investment Outstanding expenses
Stock
Sundry debtors
Bills receivable
Prepaid expenses

Liquid Assets:

Cash at bank
Cash in hand

Balance Sheet as at....

Assets $ Liabilities $

Liquid Assets: Current Liabilities:

Cash at bank Sundry creditors

Cash in hand Bills payable
Bank overdraft
Outstanding expenses
Current Assets:

Fixed Liabilities:
Investment
Stock
Sundry debtors Capital
Bills receivable Reserves
Prepaid expenses Long term loans

Fixed Assets:

Good will
Patent
Land
Building
Plant & Machinery
Furniture & Fixtures

Mixed Method:

 Under this method, assets are shown in the order of permanence and
liabilities are shown in order of liquidity.
 This method is adopted by banks and insurance companies etc.

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VERTICAL FORM:

 Vertical form also called the modern form, the report form
 The report form, on the other hand, only has one column.
 This form is more of a traditional report that is issued by companies.
 Assets are always present first followed by liabilities and equity.

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Classification of Assets

Real Assets: Assets which have some market value are called real assets.

e.g. building, machinery, stock, debtors, cash, goodwill, etc. Real assets are
further divided into two types according to their permanence:

Fixed Assets: Assets which have long life and which are bought for use for a long
period of time are called "fixed assets". These are not bought for selling purposes,

e.g. land, building, plant, machinery, furniture etc. Fixed assets are again sub-
divided into two:

1. Tangible Assets: Assets which have physical existence and which can be
seen, touched and felt are called "tangible assets",

e.g. building, plant, machinery, furniture etc.

2. Intangible Assets: Assets which have no physical existence and which

cannot be seen, touched or felt are called "intangible assets",

e.g. goodwill, patent right, trade mark etc.

Current Assets: Assets which are short-lived and which can be converted into
cash quickly to meet short term liabilities are called "current assets",

e.g. stock debtors, cash etc.

 Floating Assets: Current assets change their form repeatedly and so, they
are also known as circulating or floating assets.
For example, on purchase of goods cash is converted into stock and on
sale of goods, stock is converted into debtors, on collection from debtors,
debtors take the form of cash etc.

 Quick Assets: Out of current assets those which can be converted into cash
very quickly or which are already in the form of cash are called liquid or quick
assets

e.g. debtors, cash in hand, cash at bank etc.

Fictitious Assets: Assets which have no market value are called fictitious assets.
examples of fictitious assets include preliminary expenses, loss on issue of shares
etc. They are also known as nominal assets.
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Classification of Liabilities

Internal Liabilities:

The total amount of debts payable by a business to its owner is called internal
liability

e.g. Owner's equity (capital), reserve etc. From practical view point internal
liabilities should not be regarded as liabilities, since there is no question of meeting
such liabilities as long as the business continues.

External Liabilities:

All debts payable by a business to the outsiders (other than the owner) are
called external liabilities

e.g. creditors, debentures, bills payable, bank overdraft, etc. External

liabilities are further divided into two.

 Fixed or Long-Term Liabilities: The liabilities which are payable after

a long period of time are called fixed or long-term liabilities

e.g. debentures, loan on mortgage etc.

 Current or Short-Term Liabilities: The debts which are repayable

within a short period of time are called current or short-term liabilities
e.g. creditors, bills payable, bank overdraft etc. Current liabilities may
again be divided into two:

1. Deferred Liabilities: Debts which are repayable in the course of less than one
year but more than one month are called deferred liabilities

e.g. Short-term loan etc.

2. Liquid or Quick Liabilities: Debts are repayable in the course of a month are
called liquid or quick liabilities

e.g. bank overdraft, outstanding expenses, creditors etc.

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Contingent Liability: Besides the above, there is another type of liability which
is known as contingent liability. It is one which is not a liability at present, but
which may or may not become a liability in in future. It depends upon certain
future event.

For example, suppose, the buyer of goods filed a suit in the court against the
seller claiming damage of $10,000 for breach of contract. This will be regarded as
a contingent liability to the seller until the receipt of the court's order. To the buyer,
this is a contingent asset. Both contingent liability and contingent asset are not
recorded in the balance sheet. They are generally mentioned in the balance sheet
as a note.

Classification of equity

Equity share is a main source of finance for any company giving investors
rights to vote, share profits. There are various types of equity shares classified
based on various things.

In the financial statements of a company, equity shares are placed on the

liability side of the balance sheet. They are classified into various categories which
are as follows:

1. AUTHORIZED SHARE CAPITAL

It is the maximum amount of capital which can be issued by a company. It

can be increased from time to time. Some fee is required to be paid to legal bodies
accompanied with some formalities.

2. ISSUED SHARE CAPITAL

It is that part of authorized capital which is offered to investors.

3. SUBSCRIBED SHARE CAPITAL

It is that part of Issued capital which is accepted and agreed by the investor.

4. PAID UP CAPITAL

It is the part of the subscribed capital, the amount of which is paid by the
investor. Normally, all companies accept complete money in one shot and
therefore issued, subscribed and paid capital becomes one and the same.
Conceptually, paid-up capital is the amount of money which is actually invested in
the business.
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There are other types of equity shares discussed below:

5. RIGHTS SHARES

These are the shares issued to the existing shareholders of a company. Such
kind of shares is issued to protect the ownership rights of the existing investors.

6. BONUS SHARES

These are the type of shares given by the company to its shareholders as a
dividend. There are various advantages and disadvantages of bonus shares like
dividend, capital gain, limited liability, high risk, fluctuation in the market, etc.

7. SWEAT EQUITY SHARE

Sweat equity shares are issued to exceptional employees or directors of the

company for their exceptional job in terms of providing know-how or intellectual
property rights to the company.

Various prices of Equity Shares

a. PAR OR FACE VALUE

It is the value of a share of which it is accounted in books of accounts.

b. ISSUE PRICE

It is the price at which the equity share is actually offered to the

investor. Normally, the issue price and face value of a share are same in the
case of new companies.

c. SHARE PREMIUM AND SHARE AT DISCOUNT OR SECURITY

PREMIUM

When a share is issued at a price higher than face value, the excess
amount is called premium. Contrary to it, if the share is issued at a price
lower than face value, it is said to be issued at a discount.

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 d. BOOK VALUE

It is calculated by dividing total of paid-up capital and reserves and

surplus net of any loss by total number of equity shares of the company. This
is the balance sheet value of shares. This is an important value in case
of Mergers and Acquisition.

e. MARKET VALUE

In the case of companies listed on stock exchanges, the market value of the
share is the price at which they are sold currently sold in the market, it is also called
stock market value. It may happen that stock market value and value as per
fundamental principles differ because stock market value is affected by a number
of sentiments.

CONCLUSION:

1. It does not apply to (i) Insurance or Banking Company, (ii) Company for
which a form of balance sheet or income statement is specified under any
other Act.
2. Accounting standards shall prevail over Schedule VI of the Companies Act,
1956.
3. Disclosure on the face of the financial statements or in the notes are essential
and mandatory.
4. Current and non-current bifurcation of assets and liabilities is applicable
5. Vertical format for presentation of financial statement is prescribed
6. ‘Sundry Debtors’ and ‘Sundry Creditors’ replaced by terms ‘Trade
Receivables’ and ‘Trade Payables’.

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