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Balance Sheet

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The balance sheet is a statement of assets, capital, and liabilities of the business. It is the statement, which depicts the financial position of the business on a particular date. It is not an account rather a financial statement. It presents the liability on the left-hand side and the assets on its right-hand side either in order of permanence or order of liquidity.

The following are the main definitions of the balance sheet: -

“Balance sheet is a statement of a particular date showing on one side the trader’s property and on the other side, the liabilities.” – Palmer

“Balance sheet is a list of balances in the assets and liabilities accounts. The list depicts the position of assets and liabilities of a specific business at a specific point of time.” – AICPA

“Balance sheet is a mirror, which reflect the true position of assets and liabilities of a business on a particular date,” – O. P. Gupta

Objectives of Balance Sheet

The balance sheet is one of the important statements for every business organization. It provides information about assets and liabilities to different interested parties like investors, lenders, bankers, creditors, government, and shareholders. The main objectives of balance sheet are as follows: -

  1. To present the actual financial position of the business on a given date.
  2. To know the amount of trade debtors and creditors.
  3. To show nature, value and position of all the assets and liabilities.
  4. To help to determine the actual value of the business at the time of sale or liquidation.
  5. To know the amount of capital owing to the owner at the close of the year.
  6. To help to obtain a loan from financial institutions by reflecting the actual financial position of the business.
  7. To serve as an evidence for setting disputes.
  8. To help to judge the liquidity and solvency position of the business.
  9. To help to evaluate the strengths and weaknesses of the business.
  10. To supply reliable information regarding assets and liabilities for making a comparison and preparing plans and policies.

Advantages and Importance of Balance Sheet

The followings are the main advantages and importance of balance sheet: -

  1. It presents the true financial position of the business on a particular date. It gives the information about assets, capital and liabilities of the business.
  2. It helps to judge the liquidity and solvency position of the business.
  3. It provides the information of net profit or the net loss of the business during the year. The net profit is added to the capital, and net loss is deducted from the capital.
  4. It helps to evaluate the strengths and weaknesses of the business.
  5. It provides the reliable information about assets, liabilities and capital of the business, which helps in obtaining a loan from financial institutions.
  6. It helps for settling disputes.
  7. It helps for selling the business by presenting the true value of assets and liabilities.

Items included in Balance Sheet

The balance sheet contains the items of capital, liabilities, and assets. It is the statement which shows the financial picture of the business organization. The items shown on the balance sheet are as follows: -

Items included in Liabilities Side

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  • Capital
    Capital is an amount, which is invested by the owner for the establishment and operation of the business. Capital can be invested in terms of cash or other assets.

  • Net profit or loss
    The excess amount of income over expenditure is known as net profit. Similarly, the excess of expenditure over income is known as a net loss. The amount of net profit is added to the capital and the amount of net loss is deducted from it.

  • Drawing
    It is an amount drawn by the owner from the business in terms of cash or kind for his personal use. It reduces the capital of the businessman and hence it is deducted from the amount of capital.

  • Reserve fund
    The company may create different types of funds to meet future contingencies and losses. These funds are created out of the profit. The pension fund, dividend equalization fund, and sinking fund are some of the examples of the reserve fund.

  • Loan
    The amount borrowed from the individual and financial institution is known as a loan. Interest should be paid to the person or institution on the loan borrowed.

  • Creditors
    Creditors are the suppliers of goods. The amount payable to the supplier against the goods purchased on credit is called creditors.

  • Bills payable
    The amount of bill drawn by the creditor and accepted by the business promising in writing for paying the amount of goods purchased on credit on a certain date is called bills payable.

  • Bank overdraft
    If the bank gives the permission to withdraw the amount of cash more than the bank balance, it is called bank overdraft.

  • Outstanding expenses
    Expenses incurred but not yet paid, are called outstanding expenses. Outstanding expenses are the liabilities of the business.

  • Advance incomes
    The incomes, which are not earned but received in advance, are called advance incomes. Advance incomes are the liabilities of the business.

Items included in Assets Side

  • Fixed assets
    The assets, which are bought for using in the business for the long-term purpose is called, fixed assets. Goodwill, land, building, plant and machinery, vehicles and furniture are some of the examples of fixed assets.

  • Investment
    The amount of money, which is invested outside the business for earning incomes, is called investment.

  • Loan given
    The amount of loan given to the individual or corporation is an asset of the business. Interest is receivable on such lending loan.

  • Closing stock
    Closing stock represents the value of goods remained unsold at the end of the accounting period.

  • Debtors
    Debtors are the buyers of goods. The amount receivable from the customer against the goods sold on credit is called the debtor.

  • Bills receivable
    The amount of bill relating to the credit sale drawn by the business and accepted by the debtor promising in writing for paying the amount of bill on a certain date is called bills receivable.

  • Accrued income
    Income earned but not yet received is called accrued income. Accrued income is an asset of the business.

  • Prepaid expense
    Expense paid in advance is called prepaid expense. Prepaid expense is an asset of the business.

  • Cash at bank
    The amount of bank balance is called cash at the bank. The excess of deposit over withdrawal is considered as cash at the bank.

  • Cash in hand
    The amount of cash remains in the business at the end of the period is called cash at hand. It includes the amount of petty cash fund and the undeposited amount of cheque.



  • The balance sheet is a statement of assets, capital, and liabilities of the business.
  • Balance sheet is the statement, which depicts the financial position of the business on a particular date.
  • Balance sheet helps to judge the liquidity and solvency position of the business.
  • Balance sheet provides information about assets and liabilities to different interested parties like investors, lenders, bankers, creditors, government, and shareholders. 
  • Balance sheet is the statement which shows the financial picture of the business organization. 
  • Drawing is an amount drawn by the owner from the business in terms of cash or kind for his personal use.
  • The excess amount of income over expenditure is known as net profit. 
  • If the bank gives the permission to withdraw the amount of cash more than the bank balance, it is called bank overdraft.
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Very Short Questions

The balance sheet is a statement of assets, capital, and liabilities of the business. It is the statement, which depicts the financial position of the business on a particular date.

The balance sheet is one of the important statements for every business organization. It provides information about assets and liabilities to different interested parties like investors, lenders, bankers, creditors, government, and shareholders. The main objectives of balance sheet are as follows: -

  1. To present the actual financial position of the business on a given date.
  2. To know the amount of trade debtors and creditors.
  3. To show the nature, value and position of all the assets and liabilities.
  4. To help to determine the actual value of the business at the time of sale or liquidation.
  5. To know the amount of capital owing to the owner at the close of the year.
  6. To help to obtain a loan from financial institutions by reflecting the actual financial position of the business.
  7. To serve as an evidence for setting disputes.
  8. To help to judge the liquidity and solvency position of the business.
  9. To help to evaluate the strengths and weaknesses of the business.
  10. To supply reliable information regarding assets and liabilities for making a comparison and preparing plans and policies.

The following are the main advantages and importance of balance sheet: -

  1. It presents the true financial position of the business on a particular date. It gives the information about assets, capital and liabilities of the business.
  2. It helps to judge the liquidity and solvency position of the business.
  3. It provides the information of net profit or the net loss of the business during the year. The net profit is added to the capital, and net loss is deducted from the capital.
  4. It helps to evaluate the strengths and weaknesses of the business.
  5. It provides the reliable information about assets, liabilities and capital of the business, which helps in obtaining a loan from financial institutions.
  6. It helps for settling disputes.
  7. It helps for selling the business by presenting the true value of assets and liabilities.

The balance sheet is a statement of assets, capital, and liabilities of the business. It is not an account rather a financial statement. It presents the liability on the left-hand side and the assets on its right-hand side either in order of permanence or order of liquidity.

According to Palmer,“Balance sheet is a statement of a particular date showing on one side the trader’s property and on the other side, the liabilities.”

According toO. P. Gupta,“Balance sheet is a mirror, which reflect the true position of assets and liabilities of a business on a particular date.”

From the above definition, it is clear that balance sheetis the statement, which depicts the financial position of the business on a particular date. It provides information about assets and liabilities to different interested parties like investors, lenders, bankers, creditors, government, and shareholders.

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  • The balance sheet is a statement of ______ of the business.

    liabilities
    assets
    all the options are correct
    capital
  • ______ is the statement, which depicts the financial position of the business on a particular date.

    Profit and loss account


    Balance sheet


    Trading account


    Income and expenditure account


  • "Balance sheet is a mirror, which reflect the true position of assets and liabilities of a business on a particular date." Whose saying is this?

    O. P. Gupta
    AICPA
    Palmer
    Peter Drucker
  • Which one of them is not the objective of balance sheet?

    To help to determine the actual value of the business at the time of sale or liquidation.
    To supply reliable information regarding incomes and expenditures for making a comparison and preparing plans and policies.
    To know the amount of trade debtors and creditors.
    To present the actual financial position of the business on a given date.
  • Balance sheet is prepared at the ______.

    last day of the organiational period
    beginning day of the organization
    last day of the accounting period
    first day of the accounting period
  • The balance sheet contains the items of ______.

    all the options are correct
    assets
    liabilities
    capital
  • ______ is the statement which shows the financial picture of the business organization.

    Balance sheet


    Final account


    Trading account


    Profit and loss account


  • The excess amount of income over expenditure is known as ______.

    gross profit


    gross loss


    net profit


    net loss


  • Expense paid in advance is called ______.

    outstanding expenses


    preliminary expenses


    selling expenses


    prepaid expenses


  • Expenses incurred but not yet paid, are called ______.

    outstanding expenses


    non of them


    preliminary expenses


    prepaid expenses


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