Professional Documents
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Balance Sheet
Balance Sheet
Concepts
One must know and understand the accounting principles/concepts that are
followed while preparing the balance sheet. In total there are eleven such
principles. Five principles are related to balance sheet and six principles are
related to income statement.
The principles are self-evident for accountants because these principles are so
basic that accountants do not consciously think of these principles, but they
follow/assume. All the accountants across the globe follow with principles. In
USA, FASB has given US GAAP and in India ASB has given Indian GAAP.
Dr. Kavita Wadhwa
Balance Sheet Accounting
Principles/Concepts/Assumptions
Each and every transaction in the business affects at least two accounts.
Due to this concept, asset side of the balance sheet is always equal to
the liability side of balance sheet.
Assets are the economic resources of the firm and liabilities are the claims
on these resources. These claims are of two types. Insiders’ claim
and outsiders’ claim.
Therefore, Assets = Liabilities
Assets = Outside Liabilities + Owners equity.
Store the
Dr. Kavita Wadhwa Convert RM
product in
into FG
warehouse
Types of Current Assets
Cash and Cash equivalents (C&CE)1: Cash – Cash at hand and cash in bank (demand deposits)
CE: Short term (with maturity < 3 Months), highly liquid investments that are readily convertible to known
amounts of cash & which are subject to insignificant risk of changes in value, Like govt. securities (T‐bills, Bank
Term Deposits with original maturity < 3 Months)
Short Term Investments (or Marketable Securities)2: (Current Investments)
– Investments in govt. bonds or corporate stocks / bonds which the entity plans to hold for a relatively short
period (< 1 year), Temporary use of idle cash
Notes Receivable 3: Loans and advances given for a short duration
Accounts Receivable or Sundry Debtors or Trade Receivable 4 :
– Amounts due from others that generally arise from the sale of goods or services; Reported after deducting
Provision for doubtful debt -> Net Amount realizable
Bills Receivables5: Written promises to pay by borrowers or others in the form of Bills of exchange
Inventory : Assets that are
– Held for sale in ordinary course of business (FG),
– In process of production for sale (WIP), or
– To be consumed in production of goods or services to be sold (RM)
Supplies: Papers, envelopes etc.
Prepaid Expenses: Advance payments for services or goods not yet received like Prepaid insurance
Accrued Income – Income earned but not received.
1,2,3,4,5- Financial assets as per IFRS (new classification of current assets) Dr. Kavita Wadhwa
Non-Current Assets
Plant, Property and Equipment (PPE):
Tangible and relatively long-lived. Also known as fixed assets.
Their use spans beyond one year or the operating cycle.
They are used to produce goods and services that will generate future cash flows.
If such assets are instead held for resale, they are classified as inventory, even though in a
sense they are long-lived assets.
These also include natural resources (such as coal mines), bearer plants which are used in
the production or supply of agriculture produce (such as tea bushes, cotton plants, fruit
tree, etc).
Depreciation/Depletion is charged on these assets except land.
Other Assets:
Investments: Securities of one company owned by another company in order to
control the other company or in anticipation of earning long-term return from the
investment.
Intangible Assets: Non-physical resourced controlled by the entity. Examples:
Goodwill, Patents, Trademarks, Copyrights, Franchises, etc.
Goodwill does not appear in the books of accounts unless it is paid for. It appears in
books of accounts if it arises on acquisition of other business where purchase
price>fair value of the net assets.
Dr. Kavita Wadhwa
Tangible vs Intangible Assets
Operating vs Non-Operating Assets
Tangible assets: They have physical existence. They can seen, touched and
felt. Examples: Cash, Inventory, Furniture, Land & Buildings, Plant & Machinery.
Intangible assets: They do not have physical existence. They cannot be seen,
touched and felt. Examples, Goodwill, Patents, Copyrights, Trademarks,
Franchise Agreements, etc.
Remember: Assets such as bank deposits, accounts receivable, and long-term
investments in bonds and stocks lack physical substance, but are not classified
as intangible assets. These assets are financial instruments and derive their
value from the right or claim to receive cash or cash equivalents in the future.
Operating Assets: Assets that are required in the daily operation of a business.
In other words, operating assets are used to generate revenue from a
company’s core business activities. Examples: Cash, Inventory, P&M,
Copyrights, Patents, etc.
Non-Operating Assets: Assets that are not required for daily business operations
but can still generate revenue. Examples: Short-term investments, Marketable
securities, Vacant land, Interest income from a fixed deposit, etc.
Dr. Kavita Wadhwa
II Liabilities
Present obligations resulting from past transactions that have to be settled in future
by outflow of assets or providing services.
Liabilities are of two types: Current and Non-Current/Long-Term Liabilities
Current Liabilities: An entity shall classify a liability as current when –
(a) it expects to settle the liability within one year or its normal operating cycle
whichever is longer; or
(b) it holds the liability primarily for the purpose of trading;
(c) it does not have an unconditional right to defer settlement of the liability for at
least twelve months/operating cycle after the reporting period.
Non-Current Liabilities: Obligations that a company reasonably expects to pay at
least after one year in the future or beyond the normal operating cycle (typically
will be paid out of noncurrent assets. Primarily in the nature of long term financing.
11 The owner withdraws 5000 cash for Cash - 5,000 Common Stock
his personal use. - 5,000
12 The owner withdraws goods worth Inventory - 5,000 Common Stock
5000 for his personal use. - 5,000
Dr. Kavita Wadhwa
Balance Sheet
Assets Amount Liabilities Amount
Inventory 20,000 OE
RE 3000 993000
1503000 1503000
Dr. Kavita Wadhwa
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