Since all the nominal accounts of a trial balance are closed by transferring to the Trading Account and Profit and Loss account, there remains personal and real accounts of the trial balance. The balance sheet is prepared by taking up all the personal accounts (Capital and Drawings) and real accounts (Assets) together with the results obtained from Profit and Loss Account. All the liabilities are shown on the left hand side and the assets on the right hand side.
(1) Fixed Assets and Current Assets: Asset, acquired for utilisation, and not for resale, are termed as fixed or permanent or non-current assets.Fixed assets are generally valued at cost less depreciation. These include items acquired for use in the operation of business for a relatively long period of time such as land and building, plant and machinery, furniture, motor car, etc.
Current assets refer to those items which are converted into cash during normal operating cycle of business. For example, conversion of cash into stock, into debtors, debtors into bills receivable and bills receivable into cash completes operating cycle of business. Generally,these items are converted into cash in the normal course of business within a short period of time. Besides, cash; bank balance; bills receivable; debtors and stocks the current assets also include short-term investments, prepaid expenses and accrued incomes.
(2) Tangible, Intangible and Fictitious Assets : Tangible assets have physical identity and include items which can be seen and touched like land and building, stock, cash, furniture, etc.Intangible assets refer to those resources owned and used in the operation of business which do not have physical existence like goodwill, patents, trade marks, etc. Both tangible and intangible assets are necessary for the operation of business.Fictitious Assets, really speaking, should not be termed as assets because no benefit is derived from these assets in future operations.These include debit balance of profit and loss account, deferred revenue expenditure, suspense account, discount of issue shares and debentures expenses related to formation of business, etc. and are written off over a period of time.
(3) Short-Term and Long-Term Liabilities: Short-term Liabilities refer to those liabilities which are payable within a short period of time,ordinarily in a year. These include creditors, bills payable,outstanding expenses, Long-term liabilities due for settlement in short period of time are also termed as current liabilities.Long-term liabilities are those obligations which are to be met after one year period like term loan, public deposits, debentures, etc.
(4) Contingent Assets and Contingent Liabilities : Contingent liability refers to an obligation to pay upon the happening and non-happening of an certain event. It is not an actual liability and, therefore, it is not recorded in the balance sheet. These liabilities appear as footnote to the balance sheet. These are not provided in the books because the amount is payable only on happening or - non-happening of a particular event.
Contingent asset refers to an asset the existence, value and ownership of which depends upon the occurrence or non-occurrence of a specific event or upon the performance or non-performance of a specified act." (Kohlar Dictionary for Accountants). For example, decisions in a pending court case about the ownership of property will determine the ownership issue. Whether the business entity will get the property or not depends upon the decision of the court. Till then, it is a contingent asset.
(5) Capital and Revenue Expenditure: Expenditure refers to cost outlay during the period under consideration. If the benefit of an expenditure is confined to a short period of time normally a year, it is termed as revenue expenditure. Examples are: rent of building, salaries, insurance premium, wages, audit fees, etc. Revenue expenditure is, treated as an expense and charged to trading and profit and loss account of the current year.On the other hand, if the benefit of an expenditure is to be received over a series of accounting years it is termed as capital expenditure.
Amount incurred on purchase of fixed assets like land and building, plant and machinery, patents, trademark termed as capital expenditure because the benefit is to be received over a number of years. Amount incurred on initial repair of second-hand assets,installation of assets , extension or improvement of fixed assets also treated as capital expenditure and included in the cost of fixed assets.However, amount incurred to maintain fixed assets in working order is revenue expenditure and is debited to profit and loss account.Some practical hints for preparing final accounts are as follows :
(1) Generally trial balance is given in the question. If only ledger balances are given and trial balance is not given, it is advisable to prepare trial balance to find out difference if any, in the trial balance. Difference in trial balance is transferred to suspense account and recorded in the balance sheet.
(2) All accounts which appearing the trial balance are to be recorded at one place at the time of preparing final accounts.
(3) Nominal accounts with debit balances are either debited to trading account or profit and loss account. Similarly, nominal account with credit balances are either credited to trading account or profit and loss account.(4) Real accounts in trial balance have debit balances and are recorded on assets side of balance sheet.
(5) Personal accounts with debit balances are recorded on asset side.Personal account with credit balances are recorded on liabilities side either as capital (if the amount is payable to owner(s) or as liabilities (in case the amount is due to outsiders).
(6) All accounts with debit balances appear either on the debit side of trading account profit and loss account or on the asset side of
balance sheet. However, if account with debit balance is to be shown on opposite side, it is shown as deduction.For example, sales return account shows debit balance but is recorded on credit side of trading account and deducted from sales. All accounts with credit balances appear either on the credit side of trading account or profit and loss account or on liabilities side of balance sheet. However, if an account with credit balance is to be shown on opposite side, it is shown as deduction. For example,purchase return account with credit balance is deducted from purchases on debit side of trading account.
(7) If a particular information appears outside the trial balance, it means that has not been recorded in books. To complete double entry,it is recorded at two places at the time of preparation of final accounts. For example, information about closing stock given
outside the trial balance, is recorded on credit side of trading account and assets side of balance sheet. However, if closing stock appears in trial balance, it is to be recorded at one place only and in that case,it is recorded on asset side of balance sheet only.
(8) Only business expenses are to be transferred to trading and profit and loss account. Personal expenses of the owner(s) are to be
treated as drawings and subtracted from capital account. For example, income tax paid, life insurance premium, rent of residential building, etc. are treated as drawings and subtracted from capital account.
Difference between Trial Balance and Balance Sheet
Following are the points of difference between the Trial Balance and the Balance Sheet:
(1) Object: Trial balance is prepared to check the arithmetical accuracy of recording and Balance sheet is prepared to reveal the financial position of the business.
(2) Nature of Accounts Listed: Both trial balance and balance sheet list balances of ledger accounts. But trial balance is listing all types of accounts, namely, nominal, real and personal while balance sheet shows balances of real and personal accounts only.
(3) Net Profit/Loss: Trial balance does not contain information about net profit/loss. However details of capital account in the balance sheet provides information about net profit/loss.
(4) Classification and Listing of Accounts: In trial balance, all accounts are divided into two categories, namely, accounts with debit balances and accounts with credit balances. Debit accounts and credit accounts are listed separately. In balance sheet, balances of ledger accounts are divided into balances of assets, liabilities and capital. Assets are listed on one side and liabilities and capital on the other side.
(5) Necessity: Preparation of trial balance is not necessary but preparation of balance sheet is necessary to complete accounting process.Distinction between Profit and Loss account and balance sheet are distinguished on the following basis:
(1) Object: Profit and loss account is prepared to find out result of operation, result of business during an accounting period. Balance Sheet is prepared to portray the financial position of the business on the last day of "the accounting period.
(2) Nature of Account Listed: Profit and loss account records balances of nominal accounts. Balance sheet shows ledger balances of real
and capital accounts.
(3) Nature: Profit and loss account is a nominal account prepared to know profit (or loss) earned during a period of time. Balance sheet is a statement containing ledger balances of real and personal accounts.
(4) Balance: Balance of profit and loss account shows net profit (or loss) and is transferred to capital account. Balance sheet records assets on right hand side and liabilities and capital on left hand side. Assets are always equal to sum of capital and liabilities and there is no balancing figure.
Permanence or Rigidity Preference Method
Under this method, the least liquid or fixed assets (e.g. Plant and Machinery, Land and Building, etc.) are placed at the top of the Balance Sheet whereas more liquid or Current assets (e.g. Cash, Bank, Debtors, etc.) are listed at the bottom of the Balance Sheet. (Investments, if any, are placed in between the fixed assets and current assets). That is, it is jut the opposite of the earlier method. In case of liabilities the same principle is followed. The outline of the Balance Sheet under Rigidity Preference Method and Liquidity Preference Method is presented.Under Performance or Rigidity Preference Method
(1) Fixed Assets and Current Assets: Asset, acquired for utilisation, and not for resale, are termed as fixed or permanent or non-current assets.Fixed assets are generally valued at cost less depreciation. These include items acquired for use in the operation of business for a relatively long period of time such as land and building, plant and machinery, furniture, motor car, etc.
Current assets refer to those items which are converted into cash during normal operating cycle of business. For example, conversion of cash into stock, into debtors, debtors into bills receivable and bills receivable into cash completes operating cycle of business. Generally,these items are converted into cash in the normal course of business within a short period of time. Besides, cash; bank balance; bills receivable; debtors and stocks the current assets also include short-term investments, prepaid expenses and accrued incomes.
(2) Tangible, Intangible and Fictitious Assets : Tangible assets have physical identity and include items which can be seen and touched like land and building, stock, cash, furniture, etc.Intangible assets refer to those resources owned and used in the operation of business which do not have physical existence like goodwill, patents, trade marks, etc. Both tangible and intangible assets are necessary for the operation of business.Fictitious Assets, really speaking, should not be termed as assets because no benefit is derived from these assets in future operations.These include debit balance of profit and loss account, deferred revenue expenditure, suspense account, discount of issue shares and debentures expenses related to formation of business, etc. and are written off over a period of time.
(3) Short-Term and Long-Term Liabilities: Short-term Liabilities refer to those liabilities which are payable within a short period of time,ordinarily in a year. These include creditors, bills payable,outstanding expenses, Long-term liabilities due for settlement in short period of time are also termed as current liabilities.Long-term liabilities are those obligations which are to be met after one year period like term loan, public deposits, debentures, etc.
(4) Contingent Assets and Contingent Liabilities : Contingent liability refers to an obligation to pay upon the happening and non-happening of an certain event. It is not an actual liability and, therefore, it is not recorded in the balance sheet. These liabilities appear as footnote to the balance sheet. These are not provided in the books because the amount is payable only on happening or - non-happening of a particular event.
Contingent asset refers to an asset the existence, value and ownership of which depends upon the occurrence or non-occurrence of a specific event or upon the performance or non-performance of a specified act." (Kohlar Dictionary for Accountants). For example, decisions in a pending court case about the ownership of property will determine the ownership issue. Whether the business entity will get the property or not depends upon the decision of the court. Till then, it is a contingent asset.
(5) Capital and Revenue Expenditure: Expenditure refers to cost outlay during the period under consideration. If the benefit of an expenditure is confined to a short period of time normally a year, it is termed as revenue expenditure. Examples are: rent of building, salaries, insurance premium, wages, audit fees, etc. Revenue expenditure is, treated as an expense and charged to trading and profit and loss account of the current year.On the other hand, if the benefit of an expenditure is to be received over a series of accounting years it is termed as capital expenditure.
Amount incurred on purchase of fixed assets like land and building, plant and machinery, patents, trademark termed as capital expenditure because the benefit is to be received over a number of years. Amount incurred on initial repair of second-hand assets,installation of assets , extension or improvement of fixed assets also treated as capital expenditure and included in the cost of fixed assets.However, amount incurred to maintain fixed assets in working order is revenue expenditure and is debited to profit and loss account.Some practical hints for preparing final accounts are as follows :
(1) Generally trial balance is given in the question. If only ledger balances are given and trial balance is not given, it is advisable to prepare trial balance to find out difference if any, in the trial balance. Difference in trial balance is transferred to suspense account and recorded in the balance sheet.
(2) All accounts which appearing the trial balance are to be recorded at one place at the time of preparing final accounts.
(3) Nominal accounts with debit balances are either debited to trading account or profit and loss account. Similarly, nominal account with credit balances are either credited to trading account or profit and loss account.(4) Real accounts in trial balance have debit balances and are recorded on assets side of balance sheet.
(5) Personal accounts with debit balances are recorded on asset side.Personal account with credit balances are recorded on liabilities side either as capital (if the amount is payable to owner(s) or as liabilities (in case the amount is due to outsiders).
(6) All accounts with debit balances appear either on the debit side of trading account profit and loss account or on the asset side of
balance sheet. However, if account with debit balance is to be shown on opposite side, it is shown as deduction.For example, sales return account shows debit balance but is recorded on credit side of trading account and deducted from sales. All accounts with credit balances appear either on the credit side of trading account or profit and loss account or on liabilities side of balance sheet. However, if an account with credit balance is to be shown on opposite side, it is shown as deduction. For example,purchase return account with credit balance is deducted from purchases on debit side of trading account.
(7) If a particular information appears outside the trial balance, it means that has not been recorded in books. To complete double entry,it is recorded at two places at the time of preparation of final accounts. For example, information about closing stock given
outside the trial balance, is recorded on credit side of trading account and assets side of balance sheet. However, if closing stock appears in trial balance, it is to be recorded at one place only and in that case,it is recorded on asset side of balance sheet only.
(8) Only business expenses are to be transferred to trading and profit and loss account. Personal expenses of the owner(s) are to be
treated as drawings and subtracted from capital account. For example, income tax paid, life insurance premium, rent of residential building, etc. are treated as drawings and subtracted from capital account.
Difference between Trial Balance and Balance Sheet
Following are the points of difference between the Trial Balance and the Balance Sheet:
(1) Object: Trial balance is prepared to check the arithmetical accuracy of recording and Balance sheet is prepared to reveal the financial position of the business.
(2) Nature of Accounts Listed: Both trial balance and balance sheet list balances of ledger accounts. But trial balance is listing all types of accounts, namely, nominal, real and personal while balance sheet shows balances of real and personal accounts only.
(3) Net Profit/Loss: Trial balance does not contain information about net profit/loss. However details of capital account in the balance sheet provides information about net profit/loss.
(4) Classification and Listing of Accounts: In trial balance, all accounts are divided into two categories, namely, accounts with debit balances and accounts with credit balances. Debit accounts and credit accounts are listed separately. In balance sheet, balances of ledger accounts are divided into balances of assets, liabilities and capital. Assets are listed on one side and liabilities and capital on the other side.
(5) Necessity: Preparation of trial balance is not necessary but preparation of balance sheet is necessary to complete accounting process.Distinction between Profit and Loss account and balance sheet are distinguished on the following basis:
(1) Object: Profit and loss account is prepared to find out result of operation, result of business during an accounting period. Balance Sheet is prepared to portray the financial position of the business on the last day of "the accounting period.
(2) Nature of Account Listed: Profit and loss account records balances of nominal accounts. Balance sheet shows ledger balances of real
and capital accounts.
(3) Nature: Profit and loss account is a nominal account prepared to know profit (or loss) earned during a period of time. Balance sheet is a statement containing ledger balances of real and personal accounts.
(4) Balance: Balance of profit and loss account shows net profit (or loss) and is transferred to capital account. Balance sheet records assets on right hand side and liabilities and capital on left hand side. Assets are always equal to sum of capital and liabilities and there is no balancing figure.
Permanence or Rigidity Preference Method
Under this method, the least liquid or fixed assets (e.g. Plant and Machinery, Land and Building, etc.) are placed at the top of the Balance Sheet whereas more liquid or Current assets (e.g. Cash, Bank, Debtors, etc.) are listed at the bottom of the Balance Sheet. (Investments, if any, are placed in between the fixed assets and current assets). That is, it is jut the opposite of the earlier method. In case of liabilities the same principle is followed. The outline of the Balance Sheet under Rigidity Preference Method and Liquidity Preference Method is presented.Under Performance or Rigidity Preference Method
Example
From the following particulars prepare a Balance Sheet as at 31.12.1992 as per Rigidity Preference Method.
Capital (7.1.92) Rs. 50,000;
Drawings Rs. 3,000;
Net Profit for the year Rs. 15,000;
Closing Stock Ks. 6,000;
Loan on Mortgage Its. 7,500;
Bills Payable Rs. 2,500;
Bills Receivable Rs. 4,000;
Goodwill Rs. 6,000;
Book Debts Ps. 4,000;
Creditors Rs. 3,000;
Plant & Machinery Rs. 21,000;
Investments Rs. 9,000;
Cash in hand Rs. 1,000;
Cash at Bank Rs. 3,000;
Land & Building Rs. 17,000.
(i) Rigidity Preference Method :
From the following particulars prepare a Balance Sheet as at 31.12.1992 as per Rigidity Preference Method.
Capital (7.1.92) Rs. 50,000;
Drawings Rs. 3,000;
Net Profit for the year Rs. 15,000;
Closing Stock Ks. 6,000;
Loan on Mortgage Its. 7,500;
Bills Payable Rs. 2,500;
Bills Receivable Rs. 4,000;
Goodwill Rs. 6,000;
Book Debts Ps. 4,000;
Creditors Rs. 3,000;
Plant & Machinery Rs. 21,000;
Investments Rs. 9,000;
Cash in hand Rs. 1,000;
Cash at Bank Rs. 3,000;
Land & Building Rs. 17,000.
(i) Rigidity Preference Method :
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