Preparing the final accounts is the last stage of theaccounting cycle. They help in determining the financial position of the business at the end of the financial as well as the accounting year. These includeTrading account,Profit and loss account, andBalance sheet.
Balance Sheet
The balance sheet is a statement which statesthe assets and liabilities of a firm as at a certain date. As even a single transaction can make a difference in assets or liabilities, so the balance sheet is true only at a particular period of time. This is the significance of “asset” in the balance sheet. It is based on the accounting equation that is:
Total assets = Total liabilities + Capital
As balance sheet is a statement and not an account so there is no debit or credit side. So, Assets are shown on the right-hand side and liabilities on the left-hand side of the balance sheet.
Classification of Assets and Liabilities
Assets
Assets can be classified as:
a. Long term assets:
Long-term assets are those assets which are not to be sold by the firm and to be used for a long period of time, such types of assets are also known as Fixed assets. For example, land and building, plant and machinery, vehicles, equipment, etc.
b. Current assets:
Currents assets are those assets which can be converted into cash easily from the market. Generally within a year. For example, cash in hand, cash at bank, trade receivables, inventory, etc.
c. Intangible assets:
Intangible assets are those which cannot be seen or touched. For example, goodwill, patents, copyrights, etc.
Liabilities
Liabilities can be classified as:
a. Long term liabilities:
Long-term liabilities are those which exists for one or more than one year. For example, long-term loan from the bank.
b. Current liabilities:
Current liabilities or short-term liabilities are those which are to be settled within a year. For example, trade payables, creditors, outstanding expenses, etc.
Proforma of the Balance Sheet is given below
In the books of XYZ
Balance sheet
As at 31st March
| Liabilities | Amount | Assets | Amount |
| Capital a/c: | Tangible fixed assets: | ||
| Balance xxxx | Land and building | Xxxx | |
| Add: net profit/less net loss xxxx | Plant and machinery | Xxxx | |
| Less: drawings xxxx | xxxx | Vehicle | Xxxx |
| Long term loans: | Furniture and fixtures | Xxxx | |
| Term loans | Xxxx | Intangible assets: | |
| Other loans | Xxxx | Goodwill | Xxxx |
| Short term loans: | Patents | Xxxx | |
| Cash credit | Xxxx | Investments: | |
| Overdraft | Xxxx | Long term investment | Xxxx |
| Other loans | Xxxx | Current assets: | |
| Current liabilities: | Cash in hand | Xxxx | |
| Trade payables | Xxxx | Cash at bank | Xxxx |
| Outstanding expenses | Xxxx | Inventory | xxxx |
| Advance taken | Xxxx | Trade receivables | Xxxx |
| Provision: | Prepaid expenses | Xxxx | |
| Provision for bad and doubtful debts | xxxx | Short term investment | Xxxx |
| Provision for taxation | xxxx | Advance | Xxxx |
| Xxxx | Xxxx |
Proper presentation of the balance sheet improves the understandability of the information that is to be communicated to its users.
Characteristics of the Balance Sheet
1) Balance sheet is prepared for a particular day rather than the entire period. It will be prepared by considering activities which happened on that particular day.
2) Total of both the sides i.e Assets and liabilities will tally otherwise it is considered as an error.
3) Preparation of balance sheet is only possible after the preparation of the profit and loss a/c.That is why the P& L Account, Balance Sheet andCash flow Statementare collectively called Final Accounts.
Solved Example For You
From the following trial balance of Mr. Alfa prepare the trading account, profit, and loss account for the year ended 31st March 2018 and balance sheet as on date.
Trial balance as on 31st March 2018
| Particulars | Dr amount (in Rs) | Cr amount (in Rs) |
| Capital | 325000 | |
| Sales | 485000 | |
| Purchases | 215000 | |
| Opening stock | 55000 | |
| Freight inward | 20000 | |
| Salaries | 105000 | |
| Administration expenses | 75000 | |
| Furniture | 175000 | |
| Trade receivables | 105000 | |
| Trade payables | 95000 | |
| Purchase return | 10000 | |
| Sales return | 6000 | |
| Discounts | 9500 | 4500 |
| Bad debts | 2500 | |
| Investment | 50000 | |
| Cash in hand | 93500 | |
| 915500 | 915500 |
Other information:
- Closing stock amounted to Rs. 90,000
- Depreciation on furniture @10%.
Ans.
In the books of Mr. Alfa
Trading account
For the year ended 31st March 2018
| Particulars | Amount | Particulars | Amount | ||
| To Opening stock | 55000 | By Sales | 485000 | ||
| To Purchases | 215000 | Less: Sales return | (10000) | 475000 | |
| Less: Purchases return | (6000) | 209000 | By Closing stock | 90000 | |
| To Freight inward | 20000 | ||||
| To Gross profit | 281000 | ||||
| 565000 | 565000 |
Profit and loss account
For the year ended 31st March 2018
| Particulars | Amount | Particulars | Amount |
| To Salaries | 105000 | By Gross profit b/d | 281000 |
| To Administrative expenses | 75000 | By Discount received | 4500 |
| To Discount allowed | 9500 | ||
| To Bad debts | 2500 | ||
| To Depreciation @10% | 17500 | ||
| To Net profit | 76000 | ||
| 285500 | 285500 |
Balance sheet
As at 31st March 2018
| Liabilities | Amount | Assets | Amount |
| Capital 325000 | Furniture 175000 | ||
| Add: Net profit 76000 | 401000 | Less: depreciation @10% (7500) | 157500 |
| Trade payables | 95000 | Cash in hand and Bank | 93500 |
| Closing stock | 90000 | ||
| Trade receivables | 105000 | ||
| Investment | 50000 | ||
| 496000 | 496000 |
