Accounting information has both internal and external users.

Internal users are managers in all

areas of functional responsibility such as marketing, finance, human resources and general
management. Marketing managers use accounting information to make decisions relating to
pricing of products, sales promotion, etc. Finance managers use accounting information to
decide on making new investments, raising funds, payment of dividends, etc. Human resources
managers make decisions relating to pay revision, declaration of bonus, etc. on the basis of
accounting information. General Managers make decisions on the product-mix of the entity
using accounting information. The type of reports generated by the accounting information
system for use by managers include forecasts of income, projections of funds requirement and
availability, comparison of financial results of alternative courses of action, etc.

External users of accounting information include investors, lenders, customers, suppliers, labor
unions and the government. Owners and investors are interested in knowing whether the
business would be able to provide a reasonable return on their investment and whether to
continue with the investment in the business, how to finance the expansion of business, etc.
Lenders need information for determining the capacity of the business to pay interest and to
repay loans in time. Customers want to know whether the business will continue producing
the item they are using so that there are no problems relating to servicing of its products and
associated warranties. Suppliers want to satisfy themselves about the ability of the business to
make payments of their dues on time. Labor unions are interested in knowing whether the
business will be able to pay increased wages and bonuses. Government wants to know
whether the business is rightly determining its profit or loss and whether it is duly paying the
taxes due from it.

Answer:

The balance sheet reports the financial position of the business at a particular point of time,
generally at the end of the accounting period. It shows the amount of assets owned by the
business and the claims on these assets. The claims on the assets belong to the providers of
resources to buy the assets, i.e., the owners and creditors/lenders. As the business cannot
spend more on buying assets than the resources it has, the following relationship (also called
the accounting equation) always holds.

Assets = Owners’ Capital + Liabilities

Creditors and lenders analyze the balance sheet to understand the ability of the business to
repay their dues. The proportion of owners’ capital in relation to outside liabilities also serves
as an indicator of the financial strength of the

A balance sheet reveals the financial position of an entity. It sets out the assets, liabilities and
owners’ capital of an entity as on a certain date. Assets are economic resources controlled by an entity
which provide future cash flows to the entity. These economic resources are in the form of land and
building; plant and machinery; furniture and fixtures; investments; inventories; receivables; cash balances;
etc. Liabilities represent the claims of persons other than owners on these assets or the amount of money
provided by them for acquisition of assets. Capital represents the claims of owners on the assets or the
amount of money invested by the owners to acquire the assets.

It is prepared on a particular date and is true only on that date because even a single transaction will affect
the assets or liabilities and, there- fore, the owners’ capital shown in the balance sheet drawn on that
date. It is prepared only after preparing the profit and loss account as the net income revealed by the profit
and loss account is added to the owners’ cap- ital. The two sides of the balance sheet must have the same
total because capital is always equal to the difference between assets and liabilities, and the amount of
capital is independently arrived at by the capital account. The non-agreement of the two sides indicates the
presence of some error in the preparation.

Balance sheet is useful to both investors and lenders. Investors analyze the balance sheet to form an
opinion about the financial strength of the business. Lenders use the balance sheet to understand the
capacity of the entity to repay the borrowed money.

Balance sheet of a typical non-corporate entity in horizontal form

TABLE 3.1 BALANCE SHEET OF X AS ON MARCH 31, 2016

(HORIZONTAL FORM)
Amount Amount
Liabilities and Capital (Rs.) Assets (Rs.)
Capital 600,000 Fixed assets
Long-term debt Land 200,000
Current liabilities 300,000 Building 300,000
Creditors 50,000 Equipment 100,000
Accrued expenses 40,000 Furniture 80,000

Patents 60,000
90,000
Investments 740,000
Current assets 60,000
Cash 50,000
Debtors 40,000
Inventories 80,000
Prepaid expenses 20,000

190,000
990,000 990,000
In the vertical form of the balance sheet, capital and liabilities are listed at the top. The vertical form of the
balance sheet given in Table 3.1 is presented in Table 3.2.

TABLE 3.2 BALANCE SHEET OF X AS ON

MARCH 31, 2016 (VERTICAL FORM)
Sources of Funds
Capital and Liabilities Rs.
Capital 600,000
Long-term debt 300,000
Current liabilities
Creditors 50,000
Accrued expenses 40,000
90,000
990,000
Application of funds
Fixed assets
Land 200,000
Building 300,000
Equipment 100,000
Applications of Funds
Fixed Assets Rs.
Furniture 80,000
Patents 60,000
740,000
Investments 60,000
Current assets
Cash 50,000
Debtors 40,000
Inventories 80,000
Prepaid expenses 20,000
190,000
990,000

The various elements of the balance sheet are explained in the next section

ASSETS

FIXED ASSETS (NON-CURRENT ASSETS)

Fixed assets are meant for a long-term use and are not acquired for the purpose of resale. Fixed
assets are of two types: tangible and intangible. Tangible fixed assets have a physical existence
while intangible assets do not. Goodwill, patents, copyrights, trademarks, brands, etc. are
examples of intangible assets. Land, Buildings, Plant and Machinery and Furniture are examples
 of tangible fixed assets. Fixed assets are shown at their net value after accounting for
accumulated depreciation.

INVESTMENTS
Investments refer to money invested outside the business in the form of shares, bonds or other
instruments. Investments made for a period of more than one year are called long-term
investments. Investments made for a period of less than one year are called current
investments or marketable securities. While long-term investments are referred to as non-
current assets, short-term investments are included in current assets.

CURRENT ASSETS
Current assets are either in the form of cash or are meant to be converted into cash or other
current assets during the accounting period or the operat- ing cycle of the business, whichever
is longer. The operating cycle is the time period between two points. The first point is the time
of payment by an entity for purchase of raw materials. The second point is the time of
realization of cash from customers for sale of finished goods that are converted from the raw
material. Cash, marketable securities, debtors (accounts receivable) and
inventories of raw material and finished goods are examples of current assets. Current assets
reflect the ability of the business to pay its short-term liabilities.
LIABILITIES

The liabilities to outsiders can either be short term or long term.

LONG-TERM LIABILITIES
Long-term liabilities include borrowings from banks or financial institutions for a period of more
than one year. These may be secured or unsecured. In the case of secured loans, some assets of
the firm serve as collateral for the loan. Long-term liabilities also include bonds and debentures,
which gener- ally have a maturity of more than one year.

SHORT-TERM LIABILITIES
Short-term or current liabilities are those that must be settled within one year, for example,
creditors (accounts payable), outstanding expenses, etc.

OWNERS’ CAPITAL OR OWNERS’ EQUITY

For a non-corporate entity, owners’ capital consists of the capital originally contributed by the
owner and adjusted for subsequent profits/losses and drawings (withdrawals of money or
goods by owners for their personal use). In the case of a corporate entity, owners’ capital or
shareholders’ equity consists of share capital, retained earnings, securities premium and other
reserves.