Balance Sheets

Balance sheets: what are they?

The Balance Sheet shows the financial position of a business. Following preparation of trading and profit and loss accounts, it records the business’ assets and liabilities.

The balance sheet is used to determine the financial position of an organization. Similarly, the balance sheet must be prepared as with trade entities. As of the end of the year, it depicts liabilities and assets. There is a right-hand side for assets and a left-hand side for liabilities.

The surplus or deficit as per Income and Expenditure A/C will, however, be deducted from or added to the General Fund or Capital Fund in place of the Capital. The capital fund is often used to cover subsidized items like entrance fees, legacies, and life membership fees.

Here is the table of contents

1. A balance sheet’s features
2. Balance sheet importance
3. A balance sheet serves a specific purpose
4. What is the process of preparing a balance sheet?
5. Format for balance sheets
6. A reserve on the balance sheet
7. Creating a consolidated balance sheet
8. Consolidated Balance Sheet: How to Prepare It?

Balance sheet features include:

The features of a balance sheet are as follows:

• In the process of creating final accounts, this is the last step
• An account statement is different from a statement of account
• Assets and liabilities are recorded under the asset side of the balance sheet. The left side shows assets, while the right side shows liabilities
• It is always necessary to have the same total on both sides
• Business balance sheets reveal the financial position of the company
• A profit and loss account is prepared after trading.

A balance sheet item is also known as a characteristic of the balance sheet if all the items above are listed in it.

Balance Sheets are important for the following reasons:

There are many things you can learn about a company by analyzing its balance sheet. This is a list of some of the most important factors in a balance sheet:

• This financial tool informs creditors, investors, and other stakeholders about a company’s financial position.
• By comparing different years, it can be used to evaluate the growth of a company.
• Banks require balance sheets from companies applying for loans.
• An organization’s business accomplishments and liquidity position can be viewed by stakeholders.
• An analysis of a company’s balance sheet can reveal future expenses and expansion plans.

Balance sheets serve what purpose?

Financial status is the main purpose of the balance sheet. The balance sheet shows the assets and liabilities of a company, as well as the money invested in the business. Analyzing the financial status information over a period of time requires this statement.

A company’s balance sheet is usually used by investors and creditors to understand how efficiently it will use its resources and how much it can return. Balance sheets can be prepared at any time, but they are usually prepared at the end of an accounting period. It is possible to create the balance sheet at any time. It is usually prepared at the end of the financial year, however.

What is the process of preparing a balance sheet?

Below are the steps mentioned to prepare a balance sheet.

1. An accounting program requires a trial balance as a regular report. Create a trial balance by transferring every general ledger account’s ending balance to a spreadsheet if it is manual.
2. Ensure that the initial trial balance matches the relevant accounting structure by arranging it. To allow auditors to understand why an entry was made, all adjusting entries used to adjust the trial balance should be fully recorded.
3. A trial balance includes expenses,  revenue, losses, gains, liabilities, equity, and assets. Delete all except equity, liabilities, and assets from the trial balance. To create an income statement, deleted accounts are used.
4. The remaining accounts are calculated in this step by adding up all trial balance accounts. Balance sheets typically contain the following items:
   • Amounts in cash
   • Recipients’ accounts
   • The inventory
   • Investing in fixed assets
   • Intangible assets
   • The accounts payable department
   • Amounts owed
   • Having a debt
   • Liabilities other than these
   • Stocks of common stock
   • Profits retained by the company
5. Validate the balance sheet-  All assets on the balance sheet should equal the liabilities and stockholders’ equity on the balance sheet.
6. Balance sheet formatted according to requirements.

Format of a balance sheet:

Below is a sample balance sheet for a company.

Reserves in balance sheets are:

 In order to strengthen a company’s financial position, clear debt and credits, buy fixed assets, expand, comply with legal requirements, invest and make other plans, reserves are retained earnings. Cash is usually saved from being used for other purposes by doing these. A company can use reserve funds for any purpose without being restricted by law. Let’s say ABC has to suspend one of its products for six months and issue refunds to its buyers.

The company creates a balance sheet reserve of $1,000,000 to ensure it has enough money to provide refunds. Customers demand refunds, causing Company ABC to reduce the ₹1,00,000 In particular, insurance companies regularly create balance sheet reserves to ensure that they have the funds to pay out claims. Usually, these reserves cover the costs of applications that have been registered but not yet paid. An organization’s balance sheet records reserves as liabilities.

The consolidation of the balance sheet is as follows:

One consolidated balance sheet shows both a parent company’s liabilities and assets, along with the liabilities and assets of its subsidiaries, without specifying which item belongs to which company. When a company acquires a controlling stake or business in another company, it issues a consolidated financial statement. For instance, if an organization has 100,000 assets and buys subsidiaries for 400,000 and 300,000. Consequently, the consolidated balance sheet will show ₹1.7 million as an asset.

When recording the consolidated balance sheet, it is essential to modify the subsidiary assets figures to reflect their accurate market value. It is also not necessary to include the parent company revenue in this statement since it has a net change of 0 in it.

What is the process for preparing a consolidated balance sheet?

In order to prepare a consolidated balance sheet, first name the document, its subsidiary, and the date. Create sections for assets, liabilities, and equity in the left-side column. There should be a match between all the numbers on the sheet and the consolidated trial balances on the worksheet. The consolidated balance sheet should be reviewed after you have included the data from your worksheet.

It should have similar assets, liabilities, and equity as the parent company. Finally, delete all duplicate items and add subsidiaries.

Students in Class 12 learn “What is a Balance Sheet and its characteristics” by studying the above concept. Stay tuned to Nemani Classes for more.