Balance sheet assignment help

A balance sheet reflects the financial position of a business for the specific period of time at a given date. It is a statement of the financial position of a business which states the assets, liabilities, and owners' equity at a particular point in time. The relationship between the Balance Sheet items is expressed in this equation:

Assets = Liabilities + Equity         

The balance sheet also illustrates your business's net worth. Net worth is the total assets minus total liabilities of an individual or entity. Net worth may also be referred to as book value or owner’s (stockholders) equity.  In other words, net worth is the accounting value of an individual or entity if all assets were sold and liabilities were paid in full on a specific date.

 Importance of preparing a Balance Sheet

1. To evaluate the financial position
2. To evaluate if the business has sufficient working capital
3. To evaluate if the business has liquidity
4. To evaluate if the business has solvency
5. To comply with the tax regulations and other laws
6. To evaluate the pace at which the assets can be converted to capital
7. To evaluate the amount of profit retained in the business
8. Helps in calculating the financial ratios
9. Help the management make decisions

Balance Sheet Items

1.Assets

Assets are the economic resources for the businesses. They are the valuables that the company owns to benefit from or are used to generate income. They are the resources of the company that have future economic value. 

It can be categorized as −

Fixed Assets − Fixed assets are the purchased/constructed assets, used to earn profit not only in current year, but also in next coming years. However, it also depends upon the life and utility of the assets. Fixed assets may be tangible or intangible. Plant & machinery, land & building, furniture, and fixture are the examples of a few Fixed Assets.

Current Assets − The assets, which are easily available to discharge current liabilities of the firm called as Current Assets. Cash at bank, stock, and sundry debtors are the examples of current assets.

The order in which the current assets appear in the Balance Sheet is-

1. Cash and cash equivalents: the most liquid assets, these can include Treasury bills and short-term certificates of deposit, as well as hard currency
2. Marketable securities: equity and debt securities for which there is a liquid market
3. Accounts receivable: money which customers owe the company, perhaps including an allowance for doubtful accounts (an example of a contra account), since a certain proportion of customers can be expected not to pay
4. Inventory: goods available for sale, valued at the lower of the cost or market price
5. Prepaid expenses: representing value that has already been paid for, such as insurance, advertising contracts or rent

Fictitious Assets − Accumulated losses and expenses, which are not actually any virtual assets called as Fictitious Assets. Discount on issue of shares, Profit & Loss account, and capitalized expenditure for time being are the main examples of fictitious assets.

Cash & Cash Equivalents − Cash balance, cash at bank, and securities which are redeemable in three months if required are called as Cash & Cash equivalents.

Wasting Assets − The assets, which are reduce or exhausted in value because of their use are called as Wasting Assets. For example, mines, queries, etc.

Tangible Assets − The assets, which can be touched, seen, and have volume such as cash, stock, building, etc. are called as Tangible Assets.

Intangible Assets − The assets, which are valuable in nature, but cannot be seen, touched, and not have any volume such as patents, goodwill, and trademarks are the important examples of intangible assets.

Note: As per Generally accepted accounting principles (GAAP) guidelines, intangible assets are listed on a balance sheet only if they are acquired assets that have a lifespan and a clearly identifiable fair market value (the probable price at which a willing buyer would buy the asset from a willing seller) that can be amortized. These are reported on the balance sheet at the original cost minus depreciation. This includes items like a franchise agreements, copyrights or patents.

2.Liability

A liability is the obligation of a business/firm/company arises because of the past transactions/events, the settlement of which is expected to result in an outflow from the resources of the firm. It is an obligation that a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds it has issued to creditors to rent, utilities and salaries. 

There are two types of Liabilities −

Current Liabilities − The liabilities which are expected to be liquidated by the end of current year are called as Current Liabilities. For example, taxes, accounts payable, wages, partial payments of long term loans, etc.

Long-term Liabilities − The liabilities which are expected to be liquidated in more than a year are called as Long-term Liabilities. For example, mortgages, long-term loan, long-term bonds, pension obligations, etc.

Assets are shown on the left of the Balance Sheet whereas the liabilities are shown on the right side of the Balance Sheet. 

3.Owners’ Equity

Shareholders' equity is the money attributable to a business' owners, meaning its shareholders. It is also known as "net assets," since it is equivalent to the total assets of a company minus its liabilities.

Retained earnings are the net earnings a company either reinvests in the business or uses to pay off debt; the rest is distributed to shareholders in the form of dividends.

The shareholder’s equity generally includes shares issued to them either through equity shares (common stock) or preference shares (preferred stock). The "common stock" and "preferred stock" accounts are calculated by multiplying the par value by the number of shares issued.

Additional paid-in capital or capital surplus represents the amount shareholders have invested in excess of the "common stock" or "preferred stock" accounts, which are based on par value rather than market price. 

Grouping of the items in the Balance Sheet

There may be two types of grouping of the assets and liabilities −

1.       In order of Liquidity − In this case, assets and liabilities are arranged according to their liquidity, i.e. how fast and conveniently they can be converted into cash

2.In order of Permanence − In this case, order of the arrangement of assets and liabilities are reversed as followed in order of liquidity.

Format of a Balance Sheet

1) T-shaped Format

2) Report Format

Working Capital

Working Capital – It is the capital of a business which is used in its day-to-day trading operation. It is calculated as the difference between the Current Assets and the Current Liabilities are called as Working Capital.

Working Capital = Current assets – Current Liabilities

It shows the liquidity position the entity.

Treatment of some Balance Sheet items

1) Closing Stock: Unsold stock at the end of Financial year called Closing stock and valued at “Cost or market value whichever is less”. 

It is shown as inventory under the assets side in the Balance Sheet.

2) Outstanding Expenses: Expenses which are due or not paid called as outstanding expenses

It will appear in liabilities side of the Balance Sheet under the current liabilities.

3) Prepaid Expenses: Expenses which are paid in advance are called as Prepaid Expenses.

It will be shown in the Balance Sheet under the current assets.

4) Accrued Income: The income, which is earned during the year, but not yet received at the end of the Financial year is called as Accrued Income.