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Preparation of the balance sheet involves a lot of steps, and it shows the assets, liabilities, and shareholders’ equity of a company at a certain point in time. They give a summary of what the company owns and owes, as well as the amount invested by its owners, all in one day’s report. Preparation of the balance sheet shows the value of a company at a specific point in time so you may better comprehend its financial situation. The balance sheet is the most essential of the three financial statements used to show a company’s financial health. The other two financial statements are income statements and cash flow statements. A balance sheet aids business investors and researchers in assessing a company’s overall financial position and capacity to meet its operational expenses.
Preparation of Balance Sheet
There are a lot of steps taken for the preparation of the balance sheet, the instructions below outline the suggested method for doing so.
Step 1: Find a copy of the trial balance.
In any accounting software package, the trial balance is a standard report. If you’re using a manual system, create the trial balance by copying the ending balances from each general ledger account to a spreadsheet.
Step 2: Make any necessary adjustments to the trial balance.
To confirm that the balance sheet is compliant with the appropriate accounting system, the preliminary trial balance is frequently adjusted (such as GAAP or Ind AS). To change the trial balance, we employ adjusting entries. Every adjusting entry should be meticulously documented so that auditors may figure out why it was made.
Step 3: Remove all revenue and expense accounts from the system.
Accounts for income, expenditures, profits, losses, investments, liabilities, and equity make up the trial balance. During the preparation of the balance sheet, remove all accounts from the trial balance except those for assets, liabilities, and equity. The income statement is constructed using the eliminated accounts, by the way.
Step 4: Combine the accounts that remain.
Because the balance sheet line items are frequently significantly fewer than the trial balance line items, combine the trial balance line items with the ones used in the balance sheet. For example, the trial balance may have many cash accounts that need to be combined into a single “cash” balance sheet line item. Cash, inventories, fixed assets, assets, payables, accrued liabilities, debts, common stock, and retained earnings are all common balance sheet line items.
Step 5: Validate the balance sheet.
Check that the total of all assets on the balance sheet is the same as the total of all liabilities and shareholders’ equity accounts.
Step 6: Present in the balance sheet format.
Rewrite the resulting balance sheet in a presentation-ready manner. It could be in a comparative format, for example, with the financial situation of the company as of multiple dates displayed side by side in the report like 2018-19, 2019-20.
Format of the Balance Sheet of a Company
On one side, there are assets, and on the other, there are liabilities. Both sides of the balance sheet must tally for it to reflect the genuine picture. To comprehend the balance sheet structure, we must first comprehend the components that make it up.
Components of a balance sheet of the company
(I)EQUITY AND LIABILITIES:
Shareholder’s Funds
Non-current liabilities
Current liabilities
(II)ASSETS
Non-current Assets
Current Assets
Format of the Balance Sheet of the Company
In the balance sheet, there are two formats to depict assets, liabilities, and owners’ equity.
T-style
In this format of the balance sheet of the company, the balance sheet is separated into left and right sides in account format, similar to a T account. The assets are on the left side of the balance sheet, whereas the liabilities and equity of the owners are presented on the right side. If all of the balance sheet’s items are listed correctly, the total of the asset side (i.e., left side) must equal the total of liabilities and owners’ equity (i.e., right side).
Vertical style
The balance sheet items are presented vertically in a report style in this format of the balance sheet of the company, with the assets section at the top and the liabilities and owner’s equity portions below the assets section.
Balance Sheet Examples
There are two types of balance sheet examples, they are as follows:
Account form: The balance sheet’s presentation in the account form is identical to the accounting equation. Liabilities and stockholders’ equity are on the right, while assets are on the left. It’s simple to compare totals using the account form. It’s also a good idea to compare current assets and current liabilities.
Report style: The assets are shown at the top of the balance sheet in the report form. Liabilities are listed below the assets, followed by stockholders’ equity.
Format of the balance sheet according to the Schedule III of the Companies Act, 2013:
Name of the Company………
Balance Sheet as on…………..
(Rupees in……………….)
I) Particulars | 2) Note No. | 3) Figures as at the end of the current reporting year | 4) Figures as at the end of the previous reporting year | |
|---|---|---|---|---|
I) | EQUITY AND LIABILITY | |||
· Shareholder’s Funds a. Share Capital b. Reserves and surplus c. Money received against share warrants | ||||
Non-current Liabilities a. Long-term borrowings b. Deferred tax liabilities (NET) c. Other long-term liabilities d. Long-term provisions | ||||
Current Liabilities· a. Short term borrowings b. Trade Payables c. Other Short Term liabilities d. Short-Term Provisions | ||||
TOTAL | ||||
II) | ASSETS | |||
Non-current Assets a. Fixed assets i) Tangible assets ii) Intangible assets iii) Capital work-in-progress iv) Intangible assets under development b. Non-current investments C. Deferred tax assets (Net) d. Long-term loans and advancements e. Other non-current assets | ||||
CURRENT ASSETS a. Current investments b. Inventories c. Trade receivables d. Cash and cash equivalents e. Short-term loan and advances f. Other current assets | ||||
TOTAL |
Conclusion
The balance sheet of a corporation is extremely important, and its study provides a lot of information about the company’s overall performance. The elements of the balance sheet can be used to understand and measure a company’s financial health and growth. It also assists in determining a company’s financial performance and liquidity status. We can even determine whether a company is funded by profit or debt, as well as whether it is likely to meet its project deadlines. It allows you to make decisions about growth projects and budget for unexpected costs. The balance sheet can reveal whether the organisation is funding its operations with profit or debt.
