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Basic Structure of a Balance Sheet

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Namaste we have already discussed format of Balance Sheet.So, you know that amongst the financial statements balance sheet has a very important role andit shows the financial position as at a particular date.Now let us do a small case or a problem where we will try to prepare the balance sheet fromgiven balances, later on we will do it for a company in a company format, but this isa small exercise which wherein we will not emphasize too much on format.We will just try to prepare the basic structure of balance sheet you have a printout of thisso, have a look at it and try to solve the case along with me.Now, this is a balance sheet they have given list of balances and from this you are requiredto prepare a balance sheet.So, how shall we go about?We know there are two sides of balance sheet one represents liabilities and the other representsassets, liabilities are the way the money has been sourced and assets are the resourceswhich are required for the business.So, for each and every item go on marking it as a asset item or a liability item.For example capital, where will you capital be recorded, where will you take it?This is a liability item so, mark it as L like that try to mark each and every item.So, creditors is what type of item?Creditors represent the payables for our supply somebody has supplied us good and we haveto pay them right now it is a liability so, we will mark it as.Bank overdraft here the bank has allowed us to draw excess beyond our balance again itis one more liability so, L cash in hand this is A, furniture A, debtors these are receivablesfrom customers so, this is A. Plant and machinery or plant it is A, drawingsso, money is put in by the owners that is capital if they take out the money from thebusiness it is called as a drawing.So, this is not exactly asset, but we will mark it as minus L. So, it is a L item, butit should be reduced from L system is not allowing me to mark it that way.Now I think its fine creditors; creditors also represent, closing stock this is S, billspayable is a liability.Bills receivables and maybe other assets, but it is an asset and net profit is it anasset or liability should it be written in the balance sheet, net profit or reservesrepresents the accumulated profit of the undertaking.So, it is one of the liabilities, it belongs to the owners we will add it to the ownersfunds, but right now mark it as liability.So, we have marked all the items now based on this prepare the balance sheet you cando the exercise on your own you can halt the pause the video here and prepare the balancesheet and then we will check the solution.So, ready with the solution.I am just showing you the solution directly I hope you have made it and you are recheckingit.So, we have listed out all the assets plant, furniture these are part of fix assets debtors,closing stock, bills receivable and cash in hand these are all current assets.You can see it is as per the order of permanence, the most permanent asset is put up and themost liquid asset is put at the last.Capital minus drawings that is why we have put it as minus L then we have got two creditorshere; creditors 100000 again creditors 25000.Because these are probably long term creditors and these are short term creditors, bank overdraftand bills payables and this last creditor these are all current assets current liabilitiessorry getting it.So, this is a balance sheet as on that particular date using the balances which we were we hadbeen given.Now, let us go to the next problem this is even more interesting because here based onthe information as it is made available we are trying to prepare the balance sheet.Now we have been given a few raw transactions and directly from raw transaction we shouldmake balance sheet on respective date on each date ok.Now, Jala Ram start store on 1st January 2012 with investment of 200000 from his personalsavings he decides to call the venture as Messrs Hanuman Stores.On 2nd January the stores purchases a shop for 500000.Paying 100000 rupees in cash and signing a mortgage for 400000.So, a shop is purchased down payment of 100000 is made in cash and a mortgage is signed;that means, a loan is obtained for 400000 so, that shop of 500000s can be paid.Now the store purchases merchandise worth 50000 in cash and one fifth 150000 on credit.So, the payment for this 150000 will be made latter on, but we will have to record it rightnow on the date the transaction is entered it is recorded the payment is made as andwhen it becomes due.Now he sells half the merchandise for 150000 in cash.He sales the remaining inventory for 75000 on credit for 15 days to Mr. Bharat on 7 Januaryinventory of 150 that is the next purchase is made from Laxman on credit of rupees 30of 30 days and on 10th Jan another inventory of that inventory of 100000 was sold for 120in cash.Now here not only we have to make balance sheet we have to make balance sheet on therespective dates.You I will request you to take printout of this and solve it yourself you can take apause here solve it and then we are going to check answer for every transaction.So, you have to make series of balance sheets on 1st Jan, 2nd Jan 3rd Jan 4th Jan and soon.So you are ready ok.In the interest of time I am immediately showing you the solution I hope you are ready withthe solution by now, so, that you can cross check it.So, the first transaction was opening of a new business with investment of 200000s frompersonal savings that is a capital which Jala Ram has brought in.So, the day 1 that is on 1st January the balance sheet shows capital of 200000s Mr. Jala Ramwould have brought in cash of 200000.So, we are showing cash of 200000 the balance sheet tallies at 200000.So, total of liabilities matches the total of assets.Now this precondition should be there on all the days now.The next transaction; the next transaction is there is a purchase of shop for 500000down payment is made for 100000 and remaining is in the form of mortgage loan of 400000.So, now the on in the balance sheet on 2nd January we have added a shop of 500000 andmortgage loan payable is shown as 400000 and the cash balance which was earlier 200000has been reduced now by 100000 and now it is stands at 100000, getting it the capitalwhich was 200000 remains unchanged.So, the balance sheet on 2nd January now has a total of 200000 both of assets and liabilitiesthe balance sheet in tallying.Are you getting it.Now you will observe one thing that the earlier balance of capital of 200000s which was ason 1st January will be continued in the balance sheet of 2nd January.This happens because balance sheet is a cumulative statement, it is not a statement of anyonetransaction as on 1st January since it was only one transaction we made a fresh balancesheet, but on 2nd January we continue earlier balance of capital of 200000 and we continueto write it on 2nd January.In fact, as long as it is not paid off it will be continued to be shown in the balancesheet this balance sheet and in the subsequent balance sheets also, are you getting it.These things are very simple, but since this is a very first problem which we are discussingI am just going slow.So, it is clear to you.Now let us go to the third transaction; third transaction now there is a purchase of merchandisethat is goods are purchased 50000 in cash and remaining 150 on credit.So, on 3rd January this is how the balance sheet looks like.Now the cash balance has come down to 50000, see earlier it was 100000 since we have madea payment of 50000 for goods.The cash will come down to 50 shop remains unchanged at 500000 merchandise that is inventoryis 200000 now it is also called as goods 150 is purchased on credit 50000 is purchasedon cash so, total goods are 200000.Capital 200000 payable for mortgage this is continued in the last time on from last timethat is 400000 and payables now these are trade payables that is creditors also sometimesis called its 150000, total is 750000 sorry you getting it.This is how slowly the balance sheet will get build and more and more items will getadded.Now next transaction on 4h January half of the merchandise inventory is sold for 150000in cash.Now, on 4th of Jan the cash balance increases from 50000 plus 150 it becomes 200000.Shop 500000, unchanged merchandise earlier it was 200000, now half of it remains so,it has become 100000.Capital unchanged 200000, mortgages unchanged at 400000s, payables unchanged.Now there is a addition here because the transaction was unique compared to our earlier transactionsinventory of 100000 was sold for 150000.So, we get cash of 200000 I mean 50000 was the earlier cash, new 150 was added I willjust mark write it here for more clarity.So, we got fresh cash of 150 and merchandise or inventory or goods of 100000 were givento customers.So, inventory of 100000 sold for 150; that means, we got 50000 extra that 50000 representsprofit.So, in balance sheet we will write it as profit and loss account 50000 getting it.Now let us go to next transaction on 6th January remaining half of the inventory is sold for75000.So, now cash is 200000 shop 500000 no changes here merchandise or inventory which was 100000earlier half of it is sold.So, remaining is now 50000 a new asset that is receivables is added.So, you can see inventory of 50000 is reduced andreceivables of 75 are added, we have not yet received any cash, but we are going to receiveit in future.Still we will show 75000 in the balance sheet so, there is a difference of 25000 which isfurther profit.So, profit and loss account which was 50000 earlier is now 50 plus 25 become 75.So, capital 200000, mortgages 400000 and payables 150 they are same as in earlier balance sheet.And now the balance sheet total has become 825000.Now 7 January inventory worth 150 was purchased from Laxman on credit of 30 days.So, this is as on 7 January since the new inventory is purchased, inventory has become200000 this is a transaction on credit.So, payables will now become 300000 earlier it was 150, 150 plus 150 it become 300000all other balances are unchanged.So, now the total becomes 975.Now the last transaction on 10th January inventory costing 100000 was sold for 120 in cash.So, 10th Jan; now, the cash balance increases by 120, it was 200000 earlier becomes 320,merchandise or inventory which was 200000 of that 100000 is reduced.So, it becomes 100000, shop and receivables are unchanged because this was a cash transaction.The profit which was 75 we are going to further add 20000 to profit.Capital payables for mortgage and payables that is trade payables remain unchanged thetotal becomes 107500 are you getting.This was a very simple exercise we have seen a series of transactions and made a seriesof balance sheets for it.In real life it is not necessary to make balance sheet everyday you can make it at the endof the period at the end of 3 months or at the end month of 1 month.But within the system this is how the balance sheet gets updated or revised.So, this is only one problem where we are looking at series of balance sheet are yougetting it ok.Let us go to the third case.Now, in the third case we have been given several balances and from these balances youare required to make a vertical balance sheet.Latter on for a company we are going to make a detailed balance sheet this is a very simpleexercise where we use only a skeleton type of pattern or a structure and we will tryto make a vertical balance sheet.So, have a look at these items go through each and every item.As we did in the first case we will mark every item as asset and liability and then preparea balance sheet.One note is also given that bad debts recovered is not included in cash balance perhaps theydo not know where to write it.So, if you start from sales where will you record it in the balance sheet?Actually sales is a profit and loss item.So, it should not be recorded anywhere in the balance sheet it is just given to youas an extra balance.So, we will just mark it as PL, those of who are interested in preparing profit and lossaccount you can make it as extra work, but right now we are going not going to use this.Because we are only going to focus on the balance sheet return outward this is alsoa profit and loss item capital, capital is a balance sheet item we will write it on liabilityside discount, discount cr this is the discount which we have received it is a PL item, creditorsa liability item cash at bank credit they have given; that means, this is a bank overdraft.Normally, cash at bank is if we keep cash in bank it becomes a debit balance it becomesa asset, but here cash at bank credit; that means, we have drawn excess from the bankor it is also known as bank overdraft it is a type of loan which bank has given us.So, we will mark it as, loan credit so, we have got loan.So, again we will mark it as L bad debts recovered this is a unique item first of all everybodyhas understood what is bad debt recovered?When we sell goods it gets converted into receivables or debtors, you can see here thereis a debtors balance, now from those debtors we are supposed to receive cash.In case a particular debtors becomes non paying or becomes bankrupt, for example Vijay Mallya.So, for banks the loan which was given to Mallya became bad debts.Now, of course, government very smartly has caught it and is recovering the money fromMallya, but otherwise the money given to Mallya was more or less like a bad debt.So, in case of this party Messrs Seetha enterprises they would have given some loan and the loanis not receivable that is why they consider it as a bad debt earlier.But now that bad debt they are able to recover they have received that money as a bad debt,but they do not know where to record it.So, they have not included it in cash balance.So, now, we are going to do two things we are going to include it in the cash balanceouts.So, this is a special case this is not as such for bad debt recovered this is definitelybad debt recovered.But since the money is not shown in the cash we are going to add it in the cash.So, I have written it plus 2 cash A, A means on asset side outstanding expenses; that means,we have take we have incurred some expense likes say electricity bill, but we have notyet paid it so, it becomes a liability.Net loss companies or the enterprise is suffering loss.So, where should we write this loss will it go to balance sheet yes because if there isa profit it is added to liability side if there is a loss we will reduce it from liability.So, we will mark it as minus, salary this is a PL item, samples these are free sampleswhich are distributed it is a marketing expense.So, we will mark it as PL land and building this is a asset item, I think most of theitems are getting clear to you.Now on this side also we have got few balances we will not go for marking every item I hopeyou will be able to mark it yourself and based on this let us go for preparation of balancesheet.So, you can pause your video here and I will show you the solution please first solve itand then check with my solution.So let us have a look at the solution this is the balance sheet for Messrs Seetha enterprises.So, always have a habit of writing it on top either we can write it as a liability on oneside and asset on one side or we are I can write in the vertical form right now we aremaking it in vertical form.So, we will start with liabilities.Have a look at the items as we have marked in the earlier sheet.So, the capital is marked as L. So, we will start with capital there is a loss which isreduced from capital.So, capital minus loss the value of capital or the amount of capital is reduced then oneheading called borrowed fund is made we have written loan in that.Total capital employed then we have listed all the assets under the heading fixed assetsfirst of all building, furniture and goodwill please check with the solution which you havemade.Then in current assets we have got cash, but keep in mind we have the balance of cash wasgiven as 6000 this bad debt recovered was added to cash balance because it was not addedby them earlier.So, now we will write 6750 then debtors than closing stock.So, we get total of current assets, from current assets we are reducing the current liabilitiescreditors, outstanding expense, bank overdraft, total current liabilities and we get the netbalance as net current assets 13050.You can also write these liabilities on liability side, but we are making in a vertical format.So, we have written it under the assets and reduced it from current assets.So, total assets is 193 it matches with total liabilities 193050, getting it.This was a simple balance sheet; latter on we are also going to make balance sheet forcompanies, but just to make you understand the fundamentals we are making this simplebalance sheet.So, we will stop here Namaste.