The balance sheet

The balance sheet shows what the business has today: its assets, its liabilities and the owner's capital, on one particular date. It is a statement, not an account. It lists all the balances that were not transferred to the trading and profit and loss account.

On the liabilities side: the owner's capital, with the net profit added and drawings deducted (drawings are not shown as an asset); long-term liabilities like loans; and current liabilities like creditors, bills payable and a bank overdraft.

On the assets side: fixed assets (land, buildings, machinery, furniture), intangible assets (goodwill, patents), investments (shown at cost), and current assets (stock, debtors, bills receivable, bank, cash).

The order of items is called marshalling. Two orders are used.

• Order of permanence: the most permanent first. Land and buildings at the top, cash at the bottom.
• Order of liquidity: the easiest to turn into cash first. Cash at the top, then bank, debtors, stock... land at the bottom.

Items are also grouped: owner's funds, non-current liabilities and current liabilities on one side; non-current assets and current assets on the other. Both sides always add up to the same total, because assets = liabilities + capital.

Example: Ankit's capital ₹12,000 plus profit ₹4,500 = ₹16,500, a loan of ₹5,000 and creditors of ₹15,000 make ₹36,500. His furniture ₹15,000, debtors ₹15,500, bank ₹5,000 and cash ₹1,000 also make ₹36,500. Next year the accounts are reopened with an opening entry: Furniture, Debtors, Bank and Cash A/c Dr, To Capital, To Loan, To Creditors.