STANDARD FORMAT OF BALANCE SHEET

<< STANDARD FORMAT OF PROFIT & LOSS ACCOUNT

DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations >>

Financial Accounting (Mgt-101)

Lesson-7

STANDARD FORMAT OF BALANCE SHEET

(LIABILITY SIDE)

Particulars

Amount Rs. Amount Rs.

Liabilities

Capital and Reserves

Capital

Reserves

Profit and Loss Account

Non Current / Long Term Liabilities

Long term loans

Other long term liabilities

Current Liabilities

Trade creditors and other payables

Short term borrowings

Current portion of long term borrowings

Total

CAPITAL

Capital is the first item shown on the liability side of the balance sheet of an organization. Capital is the

Money invested in the business by the owners. Capital is a liability for the business as the business has to pay

return against this money and in case the business is closed, then it has to return the amount. Capital is also

termed as "Share Capital".

RECORDING OF CAPITAL

Recording of Capital is Simple

At the time of receipt

Debit

Cash / Bank

Credit

Capital

If the owner contributes an asset instead of cash, then

Debit

Asset Account

Credit

Capital

When the capital is repaid (this does not happen in normal course of business, but just in case)

Debit

Capital

Credit

Cash / Bank

RESERVES

The portion of profit which is not paid to proprietor, but is kept apart for meeting some known or unknown

losses is called Reserve, e.g. Reserve fund, contingencies reserve etc.

There are two major types of reserves:

Revenue reserves

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Financial Accounting (Mgt-101)

From the view point of its creation revenue reserve may again be classified into:

a. General reserve

Reserve which is not created for any specific purpose, but for strengthening the financial position of the

business is known as General Reserve, e.g. Reserve fund, contingencies reserve etc.

b. Specific Reserve

Reserve created for any special purpose is known as Specific Reserve. e.g., Dividend Equalization fund,

Debenture sinking fund etc.

Capital Reserves

Capital reserves, in most of the cases, are created due to legal requirements. Profit may arise from sources,

other than normal business activity. For example, profit on sale of fixed assets or profit on revaluation of

fixed assets. When a reserve is created out of these profits, it is termed as capital reserve. One capital reserve

about which we already know is "Fixed Assets Revaluation Reserve". Capital reserves can be used for

specific purposes only.

DIFFERENCE BETWEEN RESERVE AND PROVISION

Both reserves and provisions are created out of revenues of the business, but they differ from each other.

· Creating a provision is necessary to show a true profit for the period, whereas the reserve is created

on the discretion of the owner, out of profits.

· Provision is to be made, even, if there is a loss; Reserves are created out of profits only.

· Reserve is shown as liability in the balance sheet, Provision is shown as a reduction from the asset

against which it is created.

· Provision is used specifically for the purpose for which it is made, Reserves are usually general and

can be used for any purpose.

PROFIT AND LOSS ACCOUNT

Profit and Loss Account or Accumulated Profit and Loss Account shows the balance of un-

distributed profit accumulated over the periods.

In the first year of business, this account shows following figure:

Profits for the year

Less: Transferred to Reserve

(X)

Less: Profit distributed

(X)

Balance carried to Balance Sheet

In Subsequent years, balance brought forward from previous years and profit for the year is added

and distributed as above and the balance is carried to next year.

This is why; it is termed as Accumulated Profit and Loss Account.

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Financial Accounting (Mgt-101)

LONG TERM LOANS

The owners of the business may feel that their business can flourish, if there are more funds. These

funds can be arranged from their own resources, if possible, or they can ask a bank or financial

institution for funds. This loan, if extended by bank for a period of more than one year is termed as

a long term loan. There can be other sources of long term loans as well, e.g. Term Finance

Certificates and Debentures, where money is borrowed from general public under certain legal

restrictions.

OTHER LONG TERM LIABILITIES

These include all other liabilities that are payable after a period of one year of balance sheet date. For

example, staff gratuity and other benefits, taxes and liabilities that become payable after a period of one year.

CURRENT LIABILITIES

Current Liabilities are the obligations of the business that are payable within twelve months of the balance

sheet date. Creditors, all accrued expenses are the examples of current liabilities of the business because

business is expected to pay these back within one accounting period.

CURRENT PORTION OF LONG TERM LIABILITIES

Long term loans are usually payable in installments. Therefore, at every year end, some portion of the loan

becomes payable within one year of the balance sheet date. The portion that becomes payable within the

next accounting period is transferred to current liabilities and classified under current portion of long term

liabilities.

Format of current liabilities shown in the balance sheet is as follows:

Current Liabilities

Trade Creditors

Short Term Borrowings

Other Short Term Liabilities

Salaries Payable

Accrued Expenses

Bills payable

Advances from Customers

Current Portion of Long Term Liabilities

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