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Classification of Assets and Liabilities


As already discussed, a Balance Sheet is prepared to show the financial position of a business concern, this financial statement shows the various types of assets and liabilities.

 

BALANCE SHEET OF As at ..............

Liabilities

Rs.

Assets

Rs.

Fixed or Long - Term Liabilities

Current or Short Term Liabilities

Owner's Funds (Capital)

 

Fixed Assets

Investments

Current Assets

 

 

It is desirable that in a Balance Sheet various types of assets and liabilities should be shown separately and prominently. This would give meaningful and logical information. We shall now discuss the nature of various types of assets and liabilities.

 

The assets given above in the Balance Sheet are divided into two parts as follows:
  1. Fixed Assets - Fixed Assets are those assets that are acquired for continued use and are not meant for resale, though later it may be decided to sell a particular asset. They may be tangible like land, buildings, plant and machinery, furniture and fixtures etc., or intangible like goodwill, patents etc.
Fixed Assets may be a. Tangible and b. Intangible
  1. Tangible Fixed Assets refers to those fixed assets which can be seen and touched, eg., Land and Building, Plant and Machinery, Furniture and Fixture, etc.
  2. Intangible Fixed Assets refer to those fixed assets which are not in a physical form ie., they can neither be seen or touched eg., goodwill of a firm or the know- how which it possess, patents, trade marks etc.
Note: Fixed Assets are valued at cost less depreciation.

 

Investments - Investments represent capital expenditure on purchase of shares, debentures, bonds etc., to earn interest, dividend and other benefits.

 

Investment is shown separately in the Balance Sheet.
  1. Current Assets - These are those assets of the business which are kept temporarily for resale or for converting into cash. These are assets which are likely to be realized within a period of one year or during the normal operating cycle. A business earns profit by sale of these assets but not by keeping them in hand. Examples are - unsold finished goods, amount received from debtors, bills receivables, bank balance, and cash in hand, etc. these assets are temporary and may change. These are also called 'floating or circulating assets'. These are those assets on which any trade depends for the payment of current liabilities. In current assets except closing stock, all the assets are called 'quick assets'. These include cash, bank balance, bills receivable, debtors and readily marketable securities.
Liabilities are shown in the Balance Sheet on the left - hand side. They may be divided as follows-
  1. Long term Liabilities or Fixed Liabilities - these liabilities are not payable by the business in the next year. They mainly include long - term loans as even for ten or fifteen years or amount of debentures, etc. Funds from this source are used for purchase of fixed assets.
  2. Current Liabilities - these are liabilities payable by the business within a year. Examples are - trade creditors, bills payable, expenses outstanding, bank overdraft, etc.
  3. Owner's Funds - the amount owing to the proprietors as capital is a class by itself; it will include undistributed profits and reserves also. It is equal to the net assets of the business and is defined as the difference between assets and liabilities.
Contingent Liabilities - A Contingent Liability is a liability that becomes payable on the happening of an event. In case, the event does not happen, no amount is payable. Such liabilities are not shown in the Balance Sheet; they are revealed by way of a note. The following are the examples of contingent liabilities.
  1. Liabilities in respect of Bills Discounted - if the firm got its bills receivable discounted with the bank, the primary liability will be that of the acceptor. If the acceptor does not pay, then and only then is the firm liable.
  2. Guarantee for Loan - if the firm has stood surety for a loan, it may be liable to pay the amount if the other person fails to meet his obligation.
  3. Disputed claims - If some other party has lodged a claim against the firm, the firm will be liable to pay if the claim succeeds.
Now look at the following illustrations. It shows how the Trading and Profit and Loss Account and the Balance Sheet are prepared from the given Trial Balance.

 

Illustration 6
The following is the Trial Balance of Ram Chandra on 31st March 2008. Draw the final accounts from the balances therefrom

 

TRIAL BALANCE As at 31st March 2008

Particulars

Dr. (Rs)

Cr. (Rs)

Capital

 

1,50,000

Stock (1st April 2007)

30,000

 

Cash at Bank

10,000

 

Cash in Hand

5,000

 

Machinery

10,000

 

Furniture

13,000

 

Purchases

2,00,000

 

Wages

50,000  

Carraige

33,000

 

Salaries

70,000

 

Discount Allowed

4,000

 

Discount Received

 

5,000

Advertising

50,000

 

Office Expenses

40,000

 

Sales

 

5,00,000

Sundry Debtors

90,000

 

Sundry Creditors

 

40,000

 

6,95,000

6,95,000


Value of Closing Stock as at 31st March 2008 was Rs. 5,000

 

Solution:
TRADING AND PROFIT AND LOSS ACCOUNT OF RAM CHANDRA
For the Year ended 31st March 2008

Particulars

Rs.

Particulars

Rs.

To Opening Stock
To Purchases
To Wages
To Carriage
To Gross Profit c/d

 

 

To Salaries
To Discount Allowed
To Advertising
To Office Expenses
To Net Profit transferred to Capital A/c

30,000
2,00,000
50,000
33,000
2,37,000        
5,50,000        

 


70,000
4,000
50,000
40,000
78,000
                    
2,42,000        

 

By Sales
By Closing Stock

 

 

 


By Gross Profit b/d
By Discount Received

5,00,000
50,000

 

 

              5,50,000  

 

2,37,000
5,000

 

 

              
2,42,000  

   
BALANCE SHEET OF RAM CHANDRA As at 31st March 2008

Liabilities

Rs.

Assets

Rs.

Current Liabilities
Sundry Creditors
Capital
Opening Balance
Add: Net Profit

 

 

 

 


40,000

 

1,50,000
78,000

 

 

 

                  2,68,000     

Current Assets
Cash in Hand
Cash at Bank
Sundry Debtors
Closing Stock
Fixed Assets
Furniture
Machinery


5,000

10,000
90,000
50,000

 

13,000
1,00,000

                  2,68,000      


Illustration 7
From the Balance Sheet given below, calculate
  1. Fixed Assets
  2. Current Assets
  3. Current Liabilities
  4. Working Capital
  5. Capital Employed

Liabilities

Rs.

Assets

Rs.

Trade Creditors
Outstanding Expenses
Bank overdraft
Long - Term Loan
Interest Accrued on Long- Term Loan
Capital

2,10,000
16,000
24,000
1,00,000
5,000
4,67,000

                   8,22,000       

 

Freehold Premises
Plant and Machinery
Furniture and Fittings
Stock
Trade Debtors
Prepaid Insurance

2,00,000
1,60,000
40,000
2,40,000
1,80,000
2,000

 


                 
8,22,000     

 


Solution-
  1. Fixed Assets

Fixed Assets

Rs.

Freehold Premises
Plant and Machinery
Furniture and Fittings

2,00,000
1,60,000
40,000         
4,00,000      
 

  1. Current Assets

Current Assets

Rs.

Stock
Trade Debtors
Prepaid Insurance

2,40,000
1,80,000
2,000

                  
4,22,000      

  1. Current Liabilities

Current Liabilities

Rs.

Trade Creditors
Outstanding Expenses
Bank Overdraft
Interest accrued on Long- Term Loan

2,10,000
16,000
24,000
5,000           2,55,000       

 

  1. Working Capital

Current Assets

4,22,000

Less: Current Liabilities

2,55,000

Working Capital

1,67,000

  1. Capital Employed

Method I

Rs.

Method II

Rs.

Capital

4,67,000

Fixed Assets

4,00,000

Long - Term Loan

1,00,000

Add: Working Capital

1,67,000

Total

5,67,000

Total

5,67,000

Working Capital = Current Assets - Current Liabilities




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