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Concepts and contents for balance sheet

Accounting,Balance Sheet and concepts.

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Concepts and contents for balance sheet

  1. 1. Concepts for Balance Sheet Preparation and Its Contents Financial Accounting
  2. 2. Balance Sheet Meaning A Balance Sheet is one of the financial statements. A Balance Sheet is a statement of assets and liabilities of an enterprise at a given date. It is also called Statement of Financial Position. 4 April 2015 Financial Accounting 2
  3. 3. Features of Balance Sheet • A balance sheet is only a statement and not an account. It has no debit side or credit side. The headings of the two sides are ‘Assets’ and ‘Liabilities’. • It is prepared at a particular point of time and not for a particular period. The information contained in it is true only at the particular point of time at which it is prepared. • It is a summary of balances of those ledger accounts which have not been closed by transfer to the Trading and P & L Account. • It shows the nature and value of assets and the nature and the amount of liabilities at a given date. 4 April 2015 Financial Accounting 3
  4. 4. Need of Balance Sheet • To ascertain the nature and value of assets of a business. • To ascertain the nature and amount of liabilities of a business. • To find out the financial solvency of an enterprise. An enterprise is considered to be a solvent if its assets exceed its external liabilities. 4 April 2015 Financial Accounting 4
  5. 5. 4 April 2015 Financial Accounting 5 Reliance- Chairman’s Statement (Source: Annual Report)
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  8. 8. Sample of Horizontal Format 4 April 2015 Financial Accounting 8
  9. 9. 1. The Entity Concept 4 April 2015 Financial Accounting 9 1. Business enterprise is a separate identity apart from its owners. 2. Business is distinct from owners. 3. Business transactions are recorded in business books of accounts and owner’s transactions in his personal books of accounts. 4. The examples of entity includes proprietorship firm, partnership firm, limited liability company, trusts, clubs, societies, private limited companies, and public limited companies.
  10. 10. 1. The Entity concept 5. Enterprise is liable to the owner for the money contributed/given to the enterprise for doing business. 6. Since owner invested capital in the enterprise and takes risk he has claim on profits of the enterprise also. 7. Obligation of enterprise towards owner is shown as below in the Balance Sheet. 4 April 2015 Financial Accounting 10 Balance Sheet (Proprietary Firm) Liabilities Assets Capital (-) Drawings (+) Profit (-) Loss Balance Sheet (Company) Equities and Liabilities Shareholders’ Funds (a.) Share Capital (b.) Reserves & Surplus
  11. 11. 2. Money Measurement Concept 1. Only those transactions that can be measured in terms of money are recorded in books of accounts. 2. Measuring unit for money is taken as the currency of the ruling country. 3. It is based on implicit assumption that purchasing power of money is not of sufficient importance as to require adjustment. 4. Many material events and transactions are not recorded in the books of accounts just because it cannot be measured in monetary terms. 4 April 2015 Financial Accounting 11
  12. 12. 3. Going Concern Concept 1. The business will continue in operation for the foreseeable future. 2. It is believed that enterprise has neither the intention nor the need to close down the business or liquidate the business. 3. By virtue of this concept increase/decrease in the value of assets in the short run is ignored. 4 April 2015 Financial Accounting 12
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  16. 16. 4. Cost Concept 1. The value of the non current asset is to be determined on the basis of original cost incurred by the company to purchase and bring the asset in the working condition for its intended use. This cost is known as ‘Historic Cost’. 2. Non current assets are booked at historical cost when acquired and gradually in a systematic manner part of the cost is reduced due to amortization. Reduced portion of cost is generally known as depreciation. For Example - 4 April 2015 Financial Accounting 16 Balance Sheet Liabilities Assets Plant & Machinery (cost) Less: Depreciation Book value
  17. 17. Accounting Convention - Godrej 4 April 2015 Financial Accounting 17
  18. 18. 5. The Dual – Aspect Concept  Every transaction affects at least two items of accounting records known as dual impact of transaction.  Accounting systems are set up so as to record both of these impacts of a transaction preserving the equality of accounting equation.  Accounts are prepared on double entry system. 4 April 2015 Financial Accounting 18
  19. 19. Contents of Balance Sheet 4 April 2015 Financial Accounting 19
  20. 20. Basic Accounting Terms 1. Transaction – Events that affect the numbers in an entity’s accounting records are called transactions. It involves transfer of money or money’s worth. 2. Entity – An entity means an economic unit that performs economic activities (e.g. TESCO, TELCO, Birla Industries, Reliance Industries, Bajaj Auto, Raymond). 3. Entry – Entry is the record made in the books of accounts in respect of a transaction or event. An entry is passed on the basis of vouchers. 4 April 2015 Financial Accounting 20
  21. 21. Basic Accounting Terms 4. Voucher – Voucher is a document which serves as an evidence of a transaction. For example, in case of cash purchases, cash memos and in case of credit purchases, purchase invoice are vouchers. 4 April 2015 Financial Accounting 21
  22. 22. Equity is the residual interest of owners in the assets of the entity after deducting all its liabilities. It is also called Shareholders’ Fund or Capital. Liability is a present obligation of the arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Shareholders’ Funds (a) Share Capital - It is the amount contributed by the shareholders towards the company’s capital and is entered in the company’s share capital account. 4 April 2015 Financial Accounting 22 Items of B/S: Equity & Liabilities
  23. 23. (b) Reserves and Surplus – It is a profit achieved by a company where a certain amount of it is put back into the business which can help the business in their rainy days. 4 April 2015 Financial Accounting 23 Items of B/S - Equity & Liabilities
  24. 24. Those obligations that do not meet the criteria for being classified as current liabilities are simply called non-current liabilities. For e.g. Mortgage, bonds and long term leases etc. (a) Long-Term Borrowings – Loans taken for a time period exceeding 12 months are classified as long term borrowings. (b) Deferred Tax Liabilities - The tax effect of taxable temporary differences is recognized as deferred tax liabilities which are payable beyond 1 year period. (c) Long-Term Provisions – It includes Provision for Employee Benefits. 4 April 2015 Financial Accounting 24 Items of B/S – Non-Current Liabilities
  25. 25. These are normally paid by using existing current assets, creating other current liabilities or fulfilling contractual obligations to provide goods or services. E.g. Bills Payables, Trade Payables, Bank Overdraft etc. (a) Short-Term Borrowings – It includes Loans repayable on demand from banks and other loans payable within duration of 12 months like commercial papers. (b) Trade Payables - The trade payables show the amounts owed to suppliers for purchases of goods and services on credit. 4 April 2015 Financial Accounting 25 Items of B/S – Current Liabilities
  26. 26. (c) Other Current Liabilities – It may include advances from customers and other short term obligations of the company. (d) Short-Term Provisions – Provision for Employee Benefits, Proposed Dividend, Provision for Tax on Distributed Profit. 4 April 2015 Financial Accounting 26 Items of B/S – Current Liabilities
  27. 27. An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. For e.g. Land, Building, Machinery, Equipment etc. 4 April 2015 Financial Accounting 27 Items of B/S - Assets
  28. 28. (a) Fixed Asset - A fixed asset is an asset held with the intention of being used for the purpose of producing or supplying goods or services and is not held for sale in the normal course of business.  Tangible Fixed Assets – These have physical existence and can be seen and felt. For e.g. Land, Buildings, Furniture, Equipment etc.  Intangible Fixed Assets – These are an identifiable non-monetary assets, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. For e.g. Brand Names, Copyrights, Goodwill, Patent etc. 4 April 2015 Financial Accounting 28 Items of B/S – Non-Current Assets
  29. 29.  Capital Work-In-Progress – It is referred to as assets under construction that is not considered to be final product but must still be accounted for because funds have been invested towards its production. (b) Non-Current Investments – It is the investment which is for long period and not releasable for current period. For e.g. investment in equity instruments (subsidiary companies, associate companies), joint venture and in preference shares and in partnership firm. 4 April 2015 Financial Accounting 29 Items of B/S – Non-Current Assets
  30. 30. (c) Long-Term Loans and Advances – It includes secured and unsecured loans and advances with a duration of more than 12 months. (d) Other Non-Current Assets – It includes secured and unsecured interest accrued on loans. 4 April 2015 Financial Accounting 30 Items of B/S – Non-Current Assets
  31. 31. Cash and other assets that are expected to be realized in cash or sold or consumed during the normal operating cycle of the entity or within one year, whichever is longer, are called current assets. (a) Current Investment – A current investment that is by its nature readily realisable and is intended to be held for not more than one year from the date on which such investment is made. For e.g. Investment in Mutual Funds. 4 April 2015 Financial Accounting 31 Items of B/S – Current Assets
  32. 32. (b) Inventories – Inventories are assets which held for sale in the ordinary course of business; in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or in the rendering of services. (c) Trade Receivables – It includes the amounts receivable from customers for sales of goods or services on credit. (d) Cash and Bank Balances – It shows receipts and payments of cash. Cash includes coins, currency, cheques and amounts deposited in banks. 4 April 2015 Financial Accounting 32 Items of B/S – Current Assets
  33. 33. (e) Short-Term Loans and Advances – It includes loans and advances like loans to employees, advances to suppliers, loans and advances to subsidiary and associate companies etc. (f) Other Current Assets – It includes interest accrued on loans and deposits and other receivables. 4 April 2015 Financial Accounting 33 Items of B/S – Current Assets

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