Balance sheet

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Balance sheet

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Option : Correct Option. Solution: Balance sheet:  Balance sheet shows the financial position of the entity as at a particular point of time.  It shows what and how much entity owns (ie. its assets) and how much it owes to others (ie. its liabilities), the balance (ie. asset - liability) is the owners equity.  It is not an account, hence does not have debit and credit side.  On one side assets like fixed assets (building, machinery, furniture, etc.), current assets (like stock, debtors, cash bank balance, advances prepaid and investments, if any) are shown.  On the other side in addition to owner's capital and reserves, the outside liabilities like loans taken, creditors, expenses payable etc. are shown. The two sides total must be same.  On the asset side of balance sheet we start with most permanent to least permanent i.e. fixed assets, investments and then current assets. It is known as permanency preference. In case of manufacturer/trader this sequence is followed hence student will see this in all the chapters. When asset side starts with most liquid asset to least liquid like cash bank balance and ends with fixed assets is known as liquidity preference generally followed by institutions like banks.  Liability side is mostly same in all cases we have first owner capital and reserves, then loans and thereafter current liabilities and provisions. Balance sheet is a point of time statement, when stated as at 31.3.2006 it means as at close of that date i.e. after considering all transactions of that day. Even though balance sheet does not have debit and credit side, student should remember that asset side represent debit and capital and liability side represent credit. It will help in correctly preparing final accounts.  Generally, Mercantile/accrual system is followed, as it is the proper and complete system to measure the performance of entity. In your syllabus everywhere this is considered. Under this system, incomes are recognized when these are earned irrespective of whether amount is received or not.  Similarly expenses are recognized when these are incurred or accrued irrespective of whether amount is paid or not. As a result we have to make adjustment for expenses outstanding (payable), prepaid, income outstanding (receivable) and advance- received etc.

Balance sheet

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