Lesson-9 Balance Sheet Learning Objectives • • • • To understand the meaning of balance sheet To know the method of preparing a balance sheet To know the difference between profit and loss account and balance sheet 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 “a 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.” 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’s 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...