1.0
INTRODUCTION
After all the nominal
accounts have been closed by transferring the balances to trading and Profit
and Loss Account, the only balances remaining in the books will be those of
personal and real accounts, representing the assets and liabilities of the
business at the date of the Balance Sheet.
The balance Sheet is
not an account. It is merely a statement of ledger balances. It differs from
the Income and Expenditure Account in this respect.
2.0
OBJECTIVES
At the end of this note,
you should be able to:
• give the meaning of
Balance Sheet
• explain a Balance
Sheet as a financial Statement and not as an account
• give the specimen
of a Balance Sheet in the Cooperatives
• give the
classification of Assets and liabilities
• give the
arrangement of Balance Sheet in order of Liquidity and Permanency.
3.0
MAIN CONTENT
3.1
Balance Sheet
3.2
Meaning of Balance Sheet
A Balance Sheet is a
statement in summary form of the balances remaining in the ledgers, after all
the nominal accounts have been closed.
The Balance sheet is
therefore a statement of the balances remaining in the ledgers after the Income
and Expenditure Account is closed, because this account is the nominal account
in which all the existing nominal account balances have been collected. The
Surplus Account balance and all the real and personal account balances are
summarized in the Balance sheet.
Before the balance
sheet is prepared all the ledger account which have not been closed, must now
be closed and the balances carried down.
When the balances are
carried to a new page, instead of being entered immediately below the totals c/f
(carried forward) and b/f (Brought forward) are generally used instead of c/d
(carried down) and b/d (brought down). Balances c/d or /c/f should bear the
date of the last day in the account period, and the "Balance b/d or b/f
should bear the date of the first day in the new accounting period.
3.3
Explanation of Balance Sheet as a Financial Statement
The Balance Sheet is
not an account. It is merely a statement of ledger balances. It defers from the
Income and Expenditure Account. In this respect, when the Various Nominal
Account were closed, corresponding entries were made in the Income and
Expenditure Account. When the Real and Personal Accounts were closed the
corresponding entries were made by carrying down the balances of each account
immediately below the totals of the account.
The Balance Sheet is simply a
Statement of the balances remaining in the books after the Income and
Expenditure Account has been closed. The debit balances or Assets are put on
the right hand side of the Balance Sheet and the credit balances. i.e,
Capitals, liabilities, and Surplus, are put on the left-hand side. It should be
very carefully observed, then, that the items in the Balance sheet are placed
on the opposite sides to that on which they would have been placed if the balance
Sheet had been an account and the items had been corresponding entries arising
out of the closing of the ledger account.
A format of the
Balance Sheet of a Sole Trader
Balance
Sheet of …….as at 31st December………. 
From the above
Balance Sheet, there are a number of points relating to style that deserve your
careful attention:
1. It should be
observed that the Balance Sheet gives the financial position at a given date,
i.e. the last day of the accounting period, whereas an Income and Expenditure
Account gives the income and expenditure for a period of time, i.e. the whole
of the accounting period.
2. It is customary to
lead the left hand side "liabilities" and the right-hand side
"Assets", although strictly speaking all the items on the left-hand side
are not liabilities.
3. The omission of
"Dr." and "To" on the left-hand side, and "Cr"
and "By" on the right-hand side should be observed. These are omitted
because the Balance Sheet is not an account.
4. The use of the
words "Debtors" and "Creditors" should be noted. These
terms are used rather than the names of the individual debtors and creditors,
because in practice there would be too many for them to be specified
individually in the Balance Sheet. The Balance Sheet must be a concise statement
of ledger balances, therefore balances of the same nature are given in one
total.
5. Like the Trial
Balance, the two sides of the Balance Sheet must be equal.
3.4
The Specimen of the Balance Sheet in the Cooperatives 
3.5
Arrangement of Balance Sheet
There are two orders
in which the items in the Balance Sheet may be arrange.
i. The order of
permanency and
ii. The Order of
Liquidity.
3.5.1
Order of Permanency
In this order, the
most permanent asset is written first and the least permanent asset is written
last. It follows that Fixed Assets appear before Current Assets. Under the
Sub-heading "Fixed Assets" the assets that is likely to stay longest
with the business is written first, followed by a comparatively less permanent
asset, followed by another which is even less permanent and so on. Under the
sub-heading. "Current Assets", cash being the most liquid asset is
written last, preceded by an asset which is expected to be liquidated (i.e
converted into cash) very soon.
Balance
Sheet of …………………as at 31st December 2001 
The above Balance
Sheet shows the arrangement in order to permanency.
3.5.2
Order of Liquidity
The most liquid asset
is shown first and the most permanent asset is shown last. Current Assets
precede long term liabilities. Capital appears last. Order of Liquidity is
exactly the opposite of order of permanency.
One point should be
carefully noted. If the balance sheet is being arranged in the order of
Liquidity both the assets and liabilities sides should be written in the order
of liquidity Likewise, if the balance sheet is being arranged in the order of
permanency, both the asset and liabilities sides should be written in the order
of permanency. It is wrong to arrange one side in the order of permanency and
the other side in the order of liquidity.
Arranging
in order of Liquidity:
Balance
Sheet of ………….As at 31st December, 2001 
3.6
Classification of Assets & Liabilities
ASSETS:
i.
Fixed Assets
Those assets which
are acquired and held permanently in the business and are used for the purpose
of earning profits are called Fixed Assets. Land and Buildings, Machinery
Furniture and fixtures are some examples of these assets.
ii.
Current Assets
Those assets such as
cash, debtors and stock that can be realized and readily available to discharge
liabilities are called current assets.
iii.
Fictitious Assets
e.g. Net Loss,
Goodwill, patents and Trade Marks.
iv.
Wasting Assets
Firewood, Fuel and
Gas - Assets which are consumed in the process of operation e.g. mines and
quarries.
v. Liquid
Assets
These are cash or
such items as marketable securities which can be converted into cash quickly.
3.6.2
Liabilities
A liability is the
amount which a business is legally bound to pay.
i.
Fixed Liabilities
These are those
liabilities which are payable only on the termination of the business such as
capital which is a liability to the owner.
ii.
Long Term Liabilities
Those liabilities
which are not payable within the next accounting period but will be payable
within next five to ten years.
iii.
Current Liabilities
Those liabilities
which are payable within the next accounting period usually a year or already
due. Sundry creditors, overdraft.
4.0
CONCLUSION
As discussed in this Note,
you should note that Balance Sheet is not an account, but, is the financial
statement of a business. From the balance sheet, we can easily calculate the
working capital of a business as below:
Working Capital =
Current Assets Less Current Liabilities.
5.0
SUMMARY
In summary, a Balance
sheet is a statement prepared with a view to measure the exact financial
position of a business on a certain fixed date. The financial position of a
concern is indicated by its assets on a given date and its liabilities on that
date.
Excess of assets over
liabilities represent the capital and is indicative of the financial soundness
of a business. A Balance Sheet is also described as a Statement showing the
"Sources and Application of Capital". A properly drawn up balance
sheet gives information relating to
i. The nature and
value of assets.
ii. The nature and
extent of liabilities
iii. Whether the
business is solvent
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