Module 3. Trial balance, bank reconciliation, depreciation and final accounts

Lesson 17

17.1 Balance Sheet

A Balance Sheet is the one which shows the financial position of the firm in a systematic manner at a given date. The given date means the date at which final accounts are prepared. As we know;

Transaction→ Journal→ Ledger→ Trial balance (Personal, Real and Nominal account)→ Balance Sheet(Real and Personal account).So, only Real and Personal account are recorded in Balance Sheet. It is also known as a statement of Assets and Liabilities.

Function → To show the true picture (performance) of the business on a particular date.

Forms of Balance Sheet

Two forms of balance sheet. As per Companies Act Balance Sheet is in two form Account Form and Report Form

Structure of Balance sheet as per the Companies Act.

Account Form



  • Shared capital
  • Reserves and surplus
  • Secured loans
  • Unsecured loans
  • Current liabilities and provisions

Current liabilities


  • Fixed assets
  • Investments
  • Current assets, loans and advances

Current assets

Loans and advances

  • Miscellaneous expenditures and losses

Report Form

(1) Sources of Funds:

(a) Shareholder’s funds

(i) Share capital

(ii) Reserves and surplus

(b) Loan funds

(i) Secured loans

(ii) Unsecured loans

(2) Application of Funds:

(a) Fixed assets

(b) Investment

(c) Current assets, loans and advance

Less :current liabilities and provisions

Net current assets

(d) Miscellaneous expenditure and losses

17.2 Classification of Assets and Liabilities


Assets are what the business owns, i.e., its properties and possessions for e.g. Cash, Book-Debt, Building, Land, Stock etc. The classification of assets is given as below:

1.Fixed Assets: Fixed assets have long life i.e. more than one year, acquired and held permanently in business .They are used for purpose of earning profits and they are not for sale.e.g. Land, machinery.

Tangible assets: Which can be seen, touched etc. e.g. Machinery, building Intangible assets: those which cannot be seen and touched and seen e.g. Patent, Trade Mark etc.

2. Current Assets: These are assets which can be converted into cash a short period of time. e.g. Cash at bank, debtors, Investment etc.

3. Fictitious Assets: These are not real assets and are fictitious in nature .These are unwritten losses or Shares of Debentures, heavy advertisement expenses, etc. Fictitious assets although intangible and hence are worthless items. All such expenses have debit balances and are to be written off through Profit and Loss Account, slowly during future years and unwritten off portion of such expenses appear in Balance Sheet.

4.Wasting Assets : Assets that lose value through wear and tear or constant use, for instance ,mines, quarries etc. Natural resources like timber –land, mineral, diposits, oil reserves etc, can or use etc. Once coal has been taken out from mine new coal could not be generated so mine is treated as wasted assets.

Liquid Asset

Liquid assets are those assets, which can be readily converted into cash. It means convertibility without any appreciable loss of value.e.g. There are four things cash, Bank balance, gold, house for selland if we arrange in highest liquidity to lowest then cash comes first, then meanwhile bank balance, gold, house for sell.

17.3 Liabilities

Liabilities are the amount which a business has to pay. A liability arises when the firm gets benefit or services, promises to pay cash or provide goods and services in future.

Most of the liabilities are monetary liabilities it means that they require specific amount of cash as payment. If the payment date extends more than one year the liability is shown at the present value of the future cash outflows. Some liabilities are non-monetary; it means that the firm is expected to discharge them not by paying cash but by delivering goods or providing services. This type of non monetary liabilities is shown at the amount of cash received rather than the expected cost of good. e.g. A publisher of magazines. They are generally classified according to the period for which they are contracted.

1. Fixed Liabilities: All long period liabilities are treated as fixed liabilities whether they are payable to the proprietor or to the outsiders .For instance, debentures, mortgages, long term loans etc.
2. Current Liabilities: These are to be redeemed in the near future, usually within a year .These are short period liabilities which are payable within one year. e.g. bank loans, bills payable etc.
3. Contingent Liabilities: The liabilities which are not to be considered as liability on the date of the Balance Sheet but they may become liabilities in future due to uncertain events.e.g. A suit pending in the court, anysucpected future decision, bills discounted with bank.

Liabilities are also classified by Companies Act as follows

1. Share capital
2. Reserves and surplus
3. Secured loans
4. Unsecured loans
5. Current liabilities and provisions

These are briefly described as below:

1. Share capital: - It includes equity capital which represent contribution of equity share holders (the owners of the firm) and preference capital which represents contribution of preference share holders.
2. Reserves and surplus: - It contains retained earnings and non earning items like share premium and capital subsidy.
There are two type of reserves, one is capital reserves which includes items like share premium accounts, revaluation reserves and capital redemption reserves. A capital reserve cannot be distributed as dividend to share holder. Second type of reserve is revenue reserve which represents accumulated retained earnings from the profit of the business.
Surplus is the balance in the profit and loss account which has not been appropriated to any particular reserve account.
3. Secured loans :-
These loans are used to purchase assets which are mortgaged or kept as a collateral /security. If the borrower is unable to repay the loan then the financer can sell the asset and recover his money.
4. Unsecured loans:- In this loan no asset is offered as security or collateral
5. Current liabilities and provision: This refers to the expenses outstanding at the end of period and refers to the various provisions made for tax, bad debts.

17.4 Functions of Balance Sheet

1. Balance sheet helps in knowing past and present position of a firm. It may be called horoscope of the concern.
2. A balance sheet exhibits the true financial position of a firm at a particular date.
3. It is a mirror of business.
4. It provides valuable information to management for taking better decision through ratio analysis.
5. Financial position can be clearly known with the help of balance sheet.

17.5 Limitation of Balance Sheet

1. Historical cost of balance sheet does not convey fruitful information.
2. It can not reflect the ability or skill of staff.
3. Different assets are valued to different rules.
4. In inflationary trend if the readers are not experts may mislead.
5. It prepared on historical cost basis. Changes in prices are not considered.
6. Balance sheet has some fictitious assets, which have no market value. Such items are unnecessarily inflate the total value of assets
7. Window-dressing may be done in balance sheet.
8. It is measured in terms of money or money’s worth. This is, only those assets are recorded in it which can be expressed in money.

Last modified: Saturday, 6 October 2012, 9:12 AM