Balance Sheet: Meaning, Format & Examples

Today we are covering the topic of the Balance sheet. This is the last topic of final accounts. After this topic, we will cover all adjustments of the final account which is your next chapter. In this article, you will learn the meaning of the Balance Sheet, Feature, Needs, Format, and understand it in much better ways with examples.

Meaning of Balance Sheet: –

It is the statement showing the position of the assets and liabilities of the business for a particular accounting period. It is a list of balances of the account of assets, capital, and liabilities. The value of assets shows which we can realize from the market and the value of Liabilities shows which we have to pay in the future. Capital shows the amount invested by the owner into the business entity. it is the basis of the following accounting equation.

“Assets = Capital + Liabilities“

You can check out the above equation’s article from the below link which explained the concept behind it.

What is Accounting Equation | Example

The feature of the Balance Sheet: –

1. It is prepared at the end of the Final accounts.
2. Helpful in judging the solvency of the business entity.
3. Only a statement of assets, capital, and liabilities.
4. Not an account under the Double entry system.
5. The balance sheet has two sides:- Left side for capital and liabilities and the right side if for assets.
6. The total of both sides always equal to each other.
7. Helpful in preparation of financial statements based on the Going concern concept.
8. Disclosure of the financial position of an entity.
9. The Expenses and income accounts are not shown in the balance sheet.

The need for the Balance Sheet: –

The preparation of a balance sheet is needed to:

1. Show the actual financial position of the business.
2. Provide all necessary information to related parties like an owner, equity shareholder, financial institution.
3. Provide the growth rate of a Business.
4. Reflect the outcome of investing and financing decisions.
5. Know the claim of an owner and others in the business.

Balance Sheet Format: –

We have to prepare a balance sheet from the trial balance after preparing the trading and profit/loss account. The accounts left in the trial balance after preparing the trading and profit/loss account are posted in the balance sheet. The balance sheet is based on a simple equation i.e. Assets = capital + liabilities but there are different Balance sheet formats are available. Which we can differentiate only on the basis of the presentation of the balance of accounts. The balance sheet format are based on the following thing:-

• First is based on Liquidity 
• The second is based on Permanence 

 Based on Liquidity: –

In this format of balance sheets, Assets are arranged in such an order that most liquid asset is shown first, followed by the less liquid assets. Similarly, Liabilities are arranged in such an order that most urgent payments due shown first, followed by the less urgent and then shown capital(owner’s equity).

The following is the Proforma of the balance sheet:-

Based on Permanence: –

In this format of balance sheets, Assets are arranged in such an order that the least liquid asset is shown first, followed by the more liquid assets. Similarly, Liabilities side capital shows first and followed by the long-term/non-current liabilities and then, short terms/current liabilities.

The following is the Proforma of the balance sheet:-

Or if you want to download the Format please download the following image: –

Explanation of Column of Balance: –

1. Liabilities:- In this column, all the liabilities and capital are shown in a particular sequence.
2. Amount: – In this column, the amount of particular liability or capital shown.
3. Assets:- In this column, all the Assets are shown in a particular sequence.
4. Amount: – In this column, the amount of a particular Asset shown.

The form of Presentation: –

The balance sheet can be presented in two forms.

1. Horizontal
2. Vertical

1. The Horizontal form of the Balance sheet: –

The presentation of the Balance sheet discussed until now is called horizontal presentation. In this form of presentation, we had to present all account information across the page from left to right. All assets are shown on the corresponding side of all liabilities. All liabilities are shown on the left side of the balance sheet and all assets are shown on the right side of the balance sheet.

2. The Verticals form of the Balance sheet: –

In the vertical form of presentation, we have to present all account information across the page from top to bottom. First, we show all liabilities and capital and then after all assets. It is also present in two way

• First, based on Liquidity 
• Second, based on Permanence 

The first is based on Liquidity: –

Second is based on Permanence:- 

Or If you want to download the Format please download the following image: –

 

 

 

 

 

 

 

 

Explanation of Column of Balance: –

Note No.: –  For every liabilities, capital and assets account a detailed note will be attached with the balance sheet. in this column, the note number will be shown in references.

Current Year: – Total of detailed note of each account is shown in this column.

Previous Year: – Total of the same account from the previous year’s balance sheet will be shown in this column.

 Illustration: –

Prepare the balance sheet as of 31st March 2018

(Trial Balance only shows assets, liabilities, and capital account balances. )

Net Profit for the year ended is Rs 90,000/-

Solution: –

We will solve this example with both methods.

1) Based on Liquidity: –

2) Based on Permanence: –

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Also, check out the guidelines by the Indian Government Body from the official website www.mca.gov.in/