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Balance Sheet

All the items in the trial balance are transferred to either trading and profit and loss account or the balance sheet. All the sales, purchases and expenses go to the trading and profit and loss account. The rest are either assets or liabilities and they go to the balance sheet. The trial balance below contains only balance sheet items as the trading and profit and loss account has been prepared. It is not necessary to have a separate trial balance for balance sheet items. It is done here to ease the preparation of the balance sheet.

In preparing the trading and profit and loss account, the related accounts are closed and the balances are transferred to it. In drawing up a balance sheet, the balance sheet accounts are not closed and the balances of these accounts are merely reported on the balance sheet. In the following accounting period, these balances become opening balances as they have not been closed. However, these balances change during the period when there are transactions involving them.

Trial Balance as at 31 December 20XX (after completion of the trading and profit and loss account)

Debit Credit
$ $
Stock 850
Fixtures and fittings 900
Debtors 1,080
Creditors 1,310
Bank 1,910
Cash 420
Drawings 1,100
Capital 4,950
6,260 6,260

Before drawing up any balance sheet from the above trial balance, it would help to look at how the items are set out in the balance sheet.

Assets:

Fixed assets are:
those which are long lasting;
those used in the production process in the business;
those not bought for resale

The list of fixed assets begin with the one which last or is kept the longest. For example:

Land and buildings
Fixtures and fittings
Machinery
Motor vehicles

Current assets are those which change daily. Daily transactions affect the value of stock and debtors. The bank and cash accounts are affected too as daily receipts and payments are made.

The listing of current assets begins with the one which is most easily converted into cash. For example:

Stock
Debtors
Bank
Cash

Liabilities:
Long-term liabilities are those which are not expected to be paid in the immediate future, but the next twelve months.
Current liabilities have to be paid within the accounting period

 

Balance sheets are drawn up in two ways: horizontal and vertical

Horizontal:

Balance sheet as at 31 December 20XX

$ $ $ $
Fixed assets Capital
Fixtures and fittings 900 Balance b/f 4,610
Add: Net profit for year 340
Current assets
Stock 850 4,950
Debtors 1,080 Less: Drawings 1,100
Bank 1,910
3,850
Cash 420

4,260 Current Liabilities
Creditors 1,310
5,160 5,160


Vertical:

Balance sheet as at 31 December 20XX

$ $
Fixed assets
Fixtures and fittings 900
Current assets
Stock 850
Debtors 1,080
Bank 1,910
Cash 420

4,260
Less: Current Liabilities
Creditors 1,310 2,950


3,850

Capital
Balance b/f 4,610
Add: Net profit for the year 340

4,950
Less: Drawings 1,100

3,850

Last Updated (Thursday, 09 September 2010 12:36)