Rules of Preparation of Balance Sheet

Rules of Preparation of Balance Sheet

A balance sheet allows you to see at a glance what your company’s assets and liabilities are. The balance sheet is basically a summary of what you own and what you owe. Assets, liabilities and owner’s capital are listed as of a certain date, usually at the end of a month, quarter or fiscal year. Your balance sheet gives you a way to determine the value of your business at any particular time.

    • Preparation of balance sheet of company is very necessary, because Indian Company law 1956 gives strict instruction about the format of balance sheet of a company. A company can make balance sheet according to the form given in Part I of schedule VI of company law 1956. A company can also make balance sheet summary form, but it has to attach its schedule in which explanation of different components are given. We are explaining different components of balance sheet of company which will be helpful for students to prepare balance sheet of company.

[* Remember the form of balance sheet under Section 211]

You should remember balance sheet and its all components thoroughly. It can be made either horizontal or vertical form. But total of assets should be equal to total of liabilities. Here, I am explaining these components.

Assets Side of Balance Sheet

    • Assets are written in right side of company’s balance sheet. In these assets, we include.


    •    1. Fixed Assets
      We will show all fixed assets which are purchased and used in business. This is the long term expenditure of company. In these assets, we will include following.
      I)                    Land

      II)                  Building

      III)                Plant and Machinery

      IV)               Furniture and Fixture

      V)                 Leasehold assets

      VI)               Development of property

      VII)             Vehicles

      VIII)           Live stocks

      IX)                Railway sidings

      X)                  Equipments
      We also include intangible assets in fixed assets head. Following are the main examples of intangible assets.
      I)        Goodwill
      II)        Patents
      III)      Trade marks and design

      Depreciation is charged on every fixed asset except land, because value of land will increase after some time. Here, students are given advice that they should calculate the value of net fixed assets, if different fixed assets are purchased or sold during the year. The following table will be the part of working note.

      2.  Treatment of Investment in balance sheet
      Investment is outflow of fund for getting interest or dividend earning. So, it is the asset of company and will include in assets side. The following are the main investments.
      a)                  Investment in Government or trust securities.

      b)                  Investment in Shares, debentures or bonds
      The following points must be kept in mind while you are showing investment in balance sheet.
      i)                    Investment in fully paid up shares must be shown separately from investment in partly paid up shares.

      ii)                   Investment in the form of shares in subsidiary company must be shown separately from investment in any other company.
      c)                   Investment in immovable properties.
      d)                  Investment in the capital of partnership firms.
      Investment will be shown on cost or market value which is less.
      3.       Treatment of current assets , loan and advances in balance sheet

      A)     Current assets 
      Current assets will be shown in separate head and following components will be included in it.
      i)                    Stock in trade

      ii)                   Work in progress

      iii)                 Stock of stationary

      iv)                 Stock of loose tools

      v)                  Stock of stores and spare parts

      vi)                 Sundry debtors less provision for doubtful debts

      vii)               Cash in hand

      viii)              Bank balance
      a)      With schedule bank
      b)      With other banks
      B)      Loan and Advances
      The amount which is given by company to others in the form of loan or advances will be shown in asset side. Followings are its main examples.
      a)      Advance and loan to subsidiary company

      b)      Advance and loan to partnership firm

      c)       Bill of exchange / Bill receivables

      d)      Advance expenses paid

      e)      Outside incomes.
      4.       Miscellaneous expenditures
      Expenses which are not written off will be shown in asset side of balance sheet. There is no market value of these expenses. Examples are given below.
      i)                    Preliminary expenses

      ii)                   Commission or brokerage of subscription of shares ordebentures

      iii)                 Discount allowed on issue or shares and debentures

      iv)                 Interest paid out of capital during construction

      v)                  Development expenditure
      5.       Profit and Loss Account 
      If company suffers net loss after adjusting all reserves, then it will be shown in asset side. This amount can be also deducted from reserves in liabilities side. That time, we will not show it in asset side.
      Liabilities Side of Balance Sheet

      Liabilities are written in left side of company’s balance sheet. In these liabilities, we include.

      1.       Share Capital

      In share capital of company, we have to show authorized capital, subscribed capital, called up capital and paid up capital. For calculating paid up capital, we will deduct calls unpaid and add original paid up amount offorfeited shares.

      2.       Reserves and Surplus
      Following reserves will be shown in liabilities side of balance sheet of company.
      i)                    Capital reserves

      ii)                   Share premium account

      iii)                 Other reserves

      iv)                 Surplus balance in profit and loss account after providingdividend, bonus or reserves.

      v)                  Sinking fund
      3.       Secured Loan
      If any loan is taken by company after keeping any asset as security, then it will be shown in secured loan head. Its detail is given below.
      i)                    Debentures

      ii)                   Loan and advances from subsidiaries

      iii)                 Other loan and advances

      iv)                 Interest payable on secured loan
      4.       Unsecured loan
      Following will be the unsecured loan.
      i)                    Fixed deposits of public

      ii)                   Short term loans and advances

      iii)                 Other loans
      5.       Current Liabilities and Provisions
      All liabilities which is payable within one year, will be included in current liabilities head.
      A) Current Liabilities
      i)                    Acceptance or bill payables

      ii)                   Sundry creditors

      iii)                 Interest payable other than on loan

      iv)                 Outstanding expenditures
      B)      Provisions
      i)                    Provisions for taxations

      ii)                   Proposed dividend

      iii)                 Provision for provident fund

      iv)                 Provision for insurance, pension and other staff benefit schemes

      v)                  Other provisions
      6.       Contingent liabilities 
      These types of liabilities will not be shown in balance sheet. But a simple footnote is made for its detail. Following may be the contingent liabilities of company.
      i)                    Claims against the company not acknowledge as debts

      ii)                   Uncalled liability on shares paid

      iii)                 Areas of fixed cumulative dividends

      iv)                 Any other contingent liability of company
      Balance Sheet