BALANCE SHEET PREPARATION

BALANCE SHEET PREPARATIONPREPARED BY:Umer AliUmer TahirHaris Khan Salman ShiekhAdeel Hussain Dawar AhmedHafiz Usman

FINANCIAL STATEMENTIncome StatementCapital StatementBalance SheetCash Flow

The BALANCE SHEET is the Cornerstone to Financial Management.

BALANCE SHEETA Financial Statement that reports the Assets, Liabilities, and Owners Equity at a specific date.

Purpose of Balance Sheet:

Disclosure of values and natures of assets and liabilitiesInformation about solvencyInformation about liquidityInformation about other necessary aspectProvision of a yardstick of measurement Disclosure of values and natures of assets and liabilities: Assets and liabilities are shown in the Balance Sheet following some systematic order. This gives an idea about their natures whether fixed or fluctuating or current or tangible, etc. The value of these assets and liabilities are also made following some consistent principles.Information about solvency: The working capital position and the short run solvency of a business can be easily assessed from its current assets and current liabilities. On the other hand fixed assets and long term loans give an idea about the long run prospect.Information about liquidity: The Balance Sheets clearly exhibits the liquid assets and the readily payable external debts. It creates a transparency regarding the liquidity position.Information about other necessary aspect: A Balance Sheet helps to know about the capital employed, the nature of capitalization, the risk factor involved, the business potential, trend of profitability, managerial efficiency and economic growth in a business.Provision of a yardstick of measurement: Accounting is, at present, considered as a measurement discipline. By providing a measure of economic resources and sacrifices on a particular date, a Balance Sheet serves as a yardstick of measurement.5

Features of Balance Sheet:

It is a statement but not an accountIt is a summary of unallocated balancesIt acts as a buffer between the transactions of two consecutive accounting periodsIt acts as a resource statementi) It is a statement but not an account: No closing entry is required to transfer assets or liabilities to the Balance Sheet. It shows the stock of assets and liabilities at a particular date.ii) It is a summary of unallocated balances: According to the matching cost concept, the costs allocated to any accounting period are matched against corresponding revenues. The left over portion of costs, that is, the unallocated portion is carried forward to the next period as asset. Liabilities represent the sacrifices that tantamount to the unallocated costs. So, the Balance Sheet contains unallocated costs and corresponding sacrifices.iii) It acts as a buffer between the transactions of two consecutive accounting periods: According to the going concern concept a business is expected to continue over an indefinite life span. The Balance Sheets are interim financial report with in this span and build up the link or bridge between two accounting period.iv) It acts as a resource statement: Smith & Keith observed that a Balance Sheet shows the economic resources of the business at a point in time and the sources of those resources at the point of time.

6Debits & Credits Debits either increase a debit account or decrease a credit account. For example, a debit entry may record an increase in an asset, an expense, or a decrease in a liability.

Credits either increase a credit account or decrease a debit account. For example, a credit entry may record an decrease in an asset, an increase in a liability, or arevenueor profit.

OTHER CURRENT ASSETSBalance Sheet contains :ASSETSLIABILITIESEQUITYCURRENT ASSETSLONG TERM LIABILITIESSHORT TERM LIABILITIESOWNERS EQUITYASSETS:Asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Something a business owns.

Types Of ASSETS:-Current Assets are ones that an entity expects to use within one-year time from the reporting date.

Non Current Assets are those whose benefits are expected to last more than one year from the reporting date. Examples Of ASSETS:-EquipmentCashRaw materialFurnitureBuildingAccounts receivable SuppliesPrepaid expenses

LIABILITIES

liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.

An amount of business owes.Examples of LIABILITIES:-Account payableWages payableSalaries payableProperty taxes payableInterest payableUtilities payable and etcEQUITYEquity is the residual value or interest of the most junior class of investors in assets, after all liabilities are paid; if liability exceeds assets, negative equity exists.

Leftover assetsTypes of EQUITY:-Contributed Capital Investment By OwnerDividends Owners WithdrawalRevenue EarningExpenses A used up AssetsRELETION BETWEEN THESE IS ASSETS=LIABILITIES + EQUITYBasics for Balance Sheet:A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owesAs well as the amount invested by the shareholders.Formats:There are two formats of balance Sheets.

Horizontal Balance SheetVertical Balance SheetHorizontal Balance SheetThe first column itemizes all of the asset line items for which there are ending balances,Followed in the next column by the numbers associated with those assets.The third column lists all of the liability line items and then the equity line items.After which the fourth column states the numbers associated with these liabilities and equity items.

Vertical Balance Sheet:A vertical balance sheet is one in which the balance sheet presentation format is a single column of numbers, beginning with asset line items, followed by liability line items, and ending with shareholders' equity line items.Within each of these categories, line items are presented in decreasing order of liquidity.

Balance Sheet; Asset TypesCurrent assets (10 years)e.g. land, buildings, stocksBalance Sheet; Debt TypesCurrent liabilities (10 years)Scheduled originally to be paid in 11 or more years e.g. land debt, house payments

Balance Sheet REPRESENTS:

What does this represent?Partnership and individualDate -- This is As of what date?Listing of all assets and all liabilitiesBalances at the bottom of form Assets - Liabilities = Equity Shows financial positionNet result of past Very important component to track and monitor financial progressBasic building block for financial analysis

What a Balance Sheet is NOTDoes NOT necessarily tell you if the business is making moneyDoes NOT tell you where net worth came from

Balance Sheet Preparation

IDENTIFY clearly the person(s) or the business entity being describedSEPARATE the business assets and liabilities from the personalBe CONSISTENT as to WHEN the Balance Sheet is prepared at a minimum, prepare a net worth statement when your accounting year endsValuation of Assets -- costs and/or marketrecommend two column balance sheetTrial balanceCollection of all accounts that exist in the company's chart of accounts with balances as of a particular date.

Each account has either a debit or credit balance. The total of all debits equals the total of all credits (i.e. double-entry accounting system)

Cont..The final step is to transfer the classification totals from the trial balance to the balance sheet template.

Transfer all the debits and credit accounts into the respective assets and liabilities column.

Classify assets

Classify liabilities

Limitation of Balance Sheet:

The Balance Sheet usually shows fixed assets at depreciated values of their historical costs, that is, the cost incurred at the time of their acquisition. But in a situation where the price level becomes subject to frequent changes, the values depicted in the Balance Sheet remain incorrect.Fictitious, unrealizable and bogus assets like Unwritten off Expenses also find place in the Balance Sheet which entirely goes against the value mechanism.A Balance Sheet as a transactional statement of assets and liabilities becomes a static statement of funds, it fails to bring out important aspects like business trend, managerial efficiency, etc.A Balance Sheet fails to disclose human and efficiency of workers. It ignores qualitative aspects.Balance Sheet as an indicator of financial resources, enjoyed central attention till the 1930s. Thereafter, income statement like profit & loss accounts enjoy more attention as they can explain how and what amount of income have been generated during an accounting period.

The Balance Sheet:Building Block for Financial AnalysisFinancial PositionTrend AnalysisFeeds Into the Income StatementCommunication to SelfCommunicating with those outside the businessNeeds Good Detail THANK YOU QUESTIONS??

Sheet1Trial BalanceAs on 07 March,2015AccountsAmount(Dr) in $Amount (Cr)Cash in hand100,000Cash equivalents50,000Accounts Receivable30,000Raw Material20,000Supplies40,000Prepaid Expenses10,000Property120,000Building140,000Leasehold Improvements30,000Equipment120,000Furniture/Fixtures60,000Vehicles80,000Retained Earnings$30,000Capital$60,000Accounts Payable60,000Taxes Payable20,000unpaid salaries50,000Wages Payables120,000loan from a friend70,000

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Sheet1BALANCE SHEETAs of 07 March,2015ASSETSAmount(Dr) in $LIABILITIESAmount(Cr) in $Current AssetsCurrent LiabilitiesCash in hand100,000Cash equivalents50,000Accounts Payable60,000Accounts Receivable30,000Taxes Payable20,000Raw Material20,000unpaid salaries50,000Supplies40,000Wages Payables120,000Prepaid Expenses10,000loan from a friend70,000Total Current Assets110,000Total Current Liabilities320,000Fixed AssetsLong Term LiabilitiesProperty120,000Long Term Loan From Bank250,000Building140,000Total Long-Term Liabilities250,000Equipment150,000StockHolder's EquityFurniture/Fixtures60,000Retained Earnings$30,000Vehicles80,000Capital$60,000Subtotal550,000(Less) Accumulated DepreciationNet Fixed Assets550,000TOTAL ASSETS660,000TOTAL LIABILITIES660,000

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