The Word ‘Balance Sheet’ is defined as “a Statement which sets out the Assets and
Liabilities of a business firm and which serves to ascertain the financial position of the same on
any particular date.”
In simple words it may be defined as A condensed statement that shows the financial position of an entity on a specified date.
The Balance sheet contains two parts .
1. Left hand side i.e. the Liabilities
2. Right hand side i.e. the Assets
Assets represent everything which a business owns and has money value. Assets are always
shown as debit balance in the ledger. Assets are classified as follows.
1. Tangible Assets:
Assets which can be seen and felt by touch are called Tangible Assets. Tangible Assets are
classified into two:
a. Fixed Assets: Assets which are durable in nature and used in business over and again
are known as Fixed Assets.
e.g. land and Building, Machinery, Trucks, etc.
b. Floating Assets or Current Assets: Current Assets are i. Meant to be converted into
cash, ii. Meant for resale, iii. Likely to undergo change e.g. Cash, Balance, stock,
2. Intangible Assets: Assets which cannot be seen and has no fixed shape. E.g., goodwill,
3. Fictitious assets: Assets which have no real value and will appear on the Assets side of B/S.
are known as Fictitious assets:
E.g. Preliminary expenses, Discount or creditors.
All that the business owes to others are called Liabilities. It also includes Proprietor’s
Capital. They are known as credit balances in ledger.
Classification of Liabilities:
1. Long Term Liabilities: Liabilities will be redeemed after a long period of time 10 to 15 years
E.g. Capital, Long Term Loans.
2. Current Liabilities: Liabilities, which are redeemed within a year, are called Current
Liabilities or short-term liabilities E.g. Trade creditors, B/P, Bank Loan.
3. Contingent Liabilities: Liabilities, which have the following features, are called contingent
liabilities. They are:
a. Not actual liability at present
b. Might become a liability in future on condition that the contemplated event occurs.
E.g. Liability in respect of pending suit.
Equation of Balance Sheet:
Capital = Assets – Liabilities
Liabilities = Assets – Capital
Assets = Liabilities + Capital.
Check your Progress I:
1. _________ account enables the trader to find out Gross Profit or Loss
2. _________ account enables the trader to find out the Net Profit or Loss.
3. Direct Expenses appears on ______ side of _________ account.
4. Indirect Expenses appears on _________ side of _____ account.
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5. Wages and Salaries appear on __________ account
6. Salaries and wages appear on ________ account.
7. Trade Expenses will appear on __________ side of P & L A/c.
8. If the Trail Balance contains both Trade Expenses and Office Expenses, The Trade Expenses
Posted to _____________ account and office Expenses posted to _______ account.
9. __________ shows the Financial Position of a Trader.
10. Assets – Liabilities = _________
11. Assets – Capital = _____________
12. Capital + Liabilities = _____________
- It is helpful in finding the financial position of the business by showing assets and liabilities of the concern on a specific date.
- It discloses the solvency of business by showing how much assets are available for payment of liabilities.
- It also disclose the proprietary interest of owner.
- It helps in calculation of various ratios which help in better management of business.
- It helps in comparison of assets and liabilities of business on two dates to ascertain the progress being made by business.
- It helps to F the amount of capital employed in business