BALANCE SHEET

The balance sheet is a significant financial statement of the firm. In fact, it is called the fundamental accounting report. Other terms to describe this financial statement are the statement of financial position or the position statement. As the name suggests, the balance sheet provides information about the financial standing / position of a firm at a particular point of time, say as on March 31. It can be visualized as a snap shot of the financial status of a company. The position of the firm on the preceding or the following day is bound to be different.

The financial position of a firm as disclosed by the balance sheet refers to its resources and obligations, and the interest of its owners in the business. In operational terms, the balance sheet contains information regarding the assets, liabilities and shareholder’s equity. The balance sheet can be present in either of the two forms:Report form or Account form.

Contents of the balance sheets:

1) Assets

2) Liabilities

Assets:

Assets may be described as valuable resources owned by a business which have been acquired at a measurable money cost. As an economics resource, they satisfy three requirements. In the first place, the resource must be valuable. A resource is valuable if it is in cash or convertible into cash or it can provide future benefits to the operations of the firm. Secondly, the resources must be owned in the legal sense of the term.

Finally, the resource must be acquire at a measurable money cost. In case where an asset is not acquired with cash or promise to pay cash, the criterion is, what the asset would have cost, had cash been paid for it. The assets in the balance sheet are listed either in the order of liquidity promptness with which they are expected to be converted into cash- or in reverse order, that is, fixity or listing of the least liquid asset first, followed by others. All assets are grouped into categories, that is, assets with similar characteristics are put into one category. The assets included in one category are different from those in other categories.

The standard classification of assets divides them into:

1) Fixed assets/ long term assets

2) Current assets

3) Investments

4) Other assets

Liabilities:

The second major content of the balance sheet is liabilities of the firm. Liabilities may be defined as the claims of outsiders against the firm. Alternatively, they represent the amount that the firm owes to outsiders that is, other than owners. The assets have to be financed by different sources. One source of funds is borrowing- long term as well as short term. The firms can borrow on a long term basis from financial institutions/ banks or through bonds/ mortgages/ debentures.

The short term borrowing may be in the form of purchase of goods and services on credit. These outside sources from which a firm can borrow are termed as liabilities. Since they finance the assets, they are, in a sense, claims against the assets. The amount shown against the liability items is on the basis of the amount owed, not the amount payable.

Depending upon the periodicity of the funds, liabilities can be classified into

1) Long-term liabilities

2) Current liabilities