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Finance Tutorial Help
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Topic: Tutorial on Balance Sheets
Problem Statement:Provide a brief introduction to balance sheets and their importance in a firm’s accounting. With a suitable example, illustrate the working analysis of the procedure involved and conventions to be followed in preparing a balance sheet
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BALANCE SHEET
• Balance Sheet is a position statement.• It describes the financial position of assets &
liabilities of a firm/organization/individual as on a particular date.
• It can also be defined as a statement of the financial position of an enterprise as at a given date, which exhibits assets, liabilities, capital, etc.
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Balance Sheets in Industry Regulation
• The legal rules (Companies Act) stipulates that all firms provide– A Balance Sheet as on the last day of the financial year– A Profit & Loss Account for the financial year.
• A Balance Sheet is expected to be transparent and should reflect ‘true and fair view’. Concealing/withholding/manipulating information is seen as unethical, unprofessional and ilegal.
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Types of Balance SheetsThere are two types of Balance Sheets:1. Horizontal2. Vertical
• The vertical BS is expected to give the corresponding amounts for the preceding financial year (‘Comparatives’) for all the items shown in the BS.
• However, the same is not the case with a horizontal BS. Prototypes of both are shown hereunder.
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Horizontal Balance Sheet
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Vertical Balance Sheet
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Factors to be considered while preparing a BS
1. IS IT A BUSINESS ENTITY?: Corporations, limited liability companies, and sole proprietorships are types of common business entities.
2. IS IT A GOING CONCERN?: Currently operating business that is expected to continue to function as such and remain viable in the foreseeable future.
3. WHAT IS THE MONETARY UNIT?4. WHAT IS THE COST INVOLVED? 5. CONSERVATISM: In free enterprise capitalist firms, the
accounting practices involved might be different.6. ACCOUNTING EQUIVALENCE: Are all the accounting issues
covered in the BS?
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Prototype of a typical BS
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