THE BALANCE SHEET

THE BALANCE
SHEET
© 2023 Dr. Meera Sharma

AUTHOURED BY DR. MEERA
SHARMA

TABLE OF CONTENTS
THE BALANCE SHEET FIXED ASSETS
ACCOUNTING CONCEPTS OTHER ASSETS
ENTITY LIABILITIES
GOING CONCERN CURRENT LIABILITIES
THE COST CONCEPT NON CURRENT LIABILITIES
DUAL ASPECT OWNERS’ EQUITY
ASSETS
CURRENT ASSETS

THE BALANCE SHEET
 STATEMENT OF FINANCIAL POSITION
 DETAILS THE RESOURCES OWED AND
RESOURCES OWNED
 A list of the assets, liabilities, and owners’
equity as of a specific date

THE BALANCE SHEET
• ASSETS
– RESOURCES FROM WHICH FUTURE ECONOMIC
BENEFITS ARE LIKELY TO FLOW IN
• Eg. Cash, machinery, investments, inventory
• LIABILITIES
– OBLIGATIONS WHOSE SETTLEMENT IS LIKELY TO
RESULT IN AN OUTFLOW OF RESOURCES
• Eg. Long term and short term loans
• EQUITY
– RESIDUAL INTEREST OF OWNERS IN ASSETS AFTER
DEDUCTING ALL LIABILITIES
• Includes paid in capital and retained earnings

THE BALANCE SHEET
 OWNERS’ EQUITY AND LIABILITIES ARE
SOURCES OF FUNDS
 ASSETS ARE APPLICATIONS OF FUNDS
 SOURCES OF FUNDS SHOULD EQUAL
APPLICATIONS OF FUNDS

ACCOUNTING
CONCEPTS
• ACCOUNTING CONCEPTS BEHIND
BALANCE SHEET CONSTRUCTION
1. ENTITY
2. GOING CONCERN
3. COST
4. DUAL ASPECT

ENTITY
• AN ORGANIZATION IS AN INDEPENDENT
ENTITY
• ACCOUNTING RECORDS ARE ALWAYS KEPT
FOR THE ENTITY ON AN INDEPENDENT BASIS
• ONE ENTITY COULD BE PART OF ANOTHER,
NECESSITATING CONSOLIDATED ACCOUNTS

GOING CONCERN
• AN ORGANIZATION IS A GOING CONCERN
• IT WILL CONTINUE TO OPERATE
INDEFINITELY, IS NOT LIKELY TO BE
LIQUIDATED IN THE NEAR FUTURE
• THIS IMPLIES THAT RESOURCES NEED NOT BE
REPORTED AT THEIR CURRENT MARKET VALUE
OR LIQUIDATION VALUE

THE COST CONCEPT
• ALL ASSETS ARE INITIALLY RECORDED
AT THEIR COST OF ACQUISITION, ALSO
CALLED HISTORICAL COST
• THEIR SUBSEQUENT VALUATION
DEPENDS ON THE TYPE OF ASSET, VIZ
MONETARY OR NON MONETARY, FIXED
OR CURRENT

THE COST CONCEPT
• NON MONETARY ASSETS
 FIXED ASSETS LIKE PLANT AND
EQUIPMENT
 INVENTORY LIKE FINISHED GOODS OR
RAW MATERIAL

THE COST CONCEPT
 FIXED ASSETS CONTINUE TO BE SHOWN AT COST
SUBSEQUENT TO ACQUISITION
 HOWEVER, THEIR VALUE IS DEPRECIATED OVER THEIR
LIFETIME TO MATCH THE EXPENDITURE INCURRED ON
THEM WITH THE ANNUAL REVENUE EARNED BY THEIR
USE

THE COST CONCEPT
 INVENTORY IS VALUED AT LOWER OF COST AND NET
REALIZABLE VALUE
 NET REALIZABLE VALUE IS THE ESTIMATED
SELLING PRICE IN THE ORDINARY COURSE OF
BUSINESS LESS THE ESTIMATED COSTS OF
COMPLETION AND THE ESTIMATED COSTS
NECESSARY TO MAKE THE SALE

THE COST CONCEPT
• MONETARY ASSETS
 INVESTMENTS
 RECEIVABLES
 PREPAID EXPENSES

THE COST CONCEPT
• MONETARY ASSETS
 MOST MONETARY ASSETS ARE SHOWN AT
FAIR VALUE SUBSEQUENT TO ACQUISITION
 FAIR VALUE IS THE PRICE THAT WOULD BE
RECEIVED TO SELL AN ASSET IN AN ORDERLY
TRANSACTION BETWEEN MARKET
PARTICIPANTS AT THE MEASUREMENT DATE

THE COST CONCEPT
• BOOK VALUE IS THE VALUE AT WHICH
THE ASSET SHOWS ON THE BALANCE
SHEET
 USUALLY BOOK VALUE IS THE DEPRECIATED
HISTORICAL COST OR THE NET REALIZABLE
VALUE IN CASE OF NON MONETARY ASSETS
 AND THE FAIR VALUE IN CASE OF MONETARY
ASSETS

DUAL ASPECT
 EVERY TRANSACTION OF AN ENTERPRISE HAS A
DUAL IMPACT
 THIS IS CAPTURED THROUGH DOUBLE ENTRY
 DOUBLE ENTRY ENSURES THAT THE BASIC
ACCOUNT EQUATION HOLDS, i.e.
 ASSETS = LIABILITIES + OWNERS’ EQUITY
 INCOME STATEMENT TRANSACTIONS ALSO TIE INTO THIS
EQUATION SINCE REVENUES INCREASE OWNERS’ EQUITY
AND EXPENSES DECREASE OWNERS EQUITY

ASSETS
• ASSETS
• ECONOMIC RESOURCES CONTROLLED BY AN
ENTITY
– CURRENT ASSETS
– FIXED ASSETS
– OTHER ASSETS

CURRENT ASSETS
• CURRENT ASSETS
 EXPECTED TO BE CONSUMED OR SOLD WITHIN AN
OPERATING CYCLE OR A YEAR, WHICHEVER IS LONGER
 OPERATING CYCLE IS THE TIME TAKEN TO CONVERT
INVENTORY INTO CASH
• EXAMPLES
 CASH
 MARKETABLE SECURITIES
 RECEIVABLES
 INVENTORIES
 PREPAID EXPENSES

FIXED ASSETS
• FIXED ASSETS
 AN ASSET HELD WITH THE INTENTION OF BEING USED
FOR PRODUCING GOODS OR SERVICES AND NOT HELD
FOR SALE IN THE NORMAL COURSE OF BUSINESS
 ACCOUNTED FOR AT HISTORICAL COST NET OF
ACCUMULATED DEPRECIATION
 EXAMPLES
 PLANT AND EQUIPMENT

OTHER ASSETS
• OTHER ASSETS
 INVESTMENTS
 INTANGIBLE ASSETS

LIABILITIES
• LIABILITIES
 PRESENT OBLIGATIONS DUE TO PAST EVENTS
WHOSE SETTLEMENT IS LIKELY TO RESULT IN
AN OUTFLOW OF RESOURCES

LIABILITIES
• LIABILITIES ARE REPORTED AT THE
AMOUNT REQUIRED TO SATISFY THE
OBLIGATION AS ON THE BALANCE SHEET
DATE

CURRENT LIABILITIES
 CURRENT LIABILITIES
 PAYABLES
 ACCRUED EXPENSES (EXPENSES INCURRED BUT NOT
DUE FOR PAYMENT)
 UNEARNED REVENUE (ADVANCE PAYMENTS FROM
CUSTOMERS)
 CURRENT PORTION OF LONG TERM DEBT (PORTION OF
LONG TERM DEBT MATURING WITHIN A YEAR

NON CURRENT
LIABILITIES
• NON CURRENT LIABILITY
 LONG TERM DEBT
 DEBT THAT MATURES IN MORE THAN ONE YEAR

OWNERS’ EQUITY
• OWNERS’ EQUITY
 RESIDUAL INTEREST IN ASSETS AFTER DEDUCTING
LIABILITIES
 PAID-IN CAPITAL
 ADDITIONAL PAID-IN CAPITAL OR PREMIUM
 RETAINED EARNINGS
CUMULATIVE
INCOME RETAINED
IN BUSINESS
SINCE
INCEPTION

OWNERS’ EQUITY
 PAID-IN CAPITAL
 AMOUNT OF RESOURCES CONTRIBUTED BY OWNERS
FOR OWNERSHIP STAKE IN THE COMPANY AT PAR
VALUE
 ADDITIONAL PAID-IN CAPITAL OR PREMIUM
 AMOUNT OF RESOURCES CONTRIBUTED BY OWNERS
IN EXCESS OF PAR VALUE

THE BALANCE SHEET

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