How to Understand Balance Sheet Statement

To understand balance sheet statement means to understand each item of balance sheet. Balance sheet is not just list of assets and liabilities but there are lots of adjustments of depreciation,  provisions, funds and reserves in it. As a common man, you should understand all these things step by step. You should also understand that all assets and liabilities are not fixed but they are flexible on the basis of getting and  repayment of liabilities and sales and purchase of assets. Today, we teach to the common man who do not know the balance sheet.

1. Just search on the images of google, you find the proforma of balance sheet. Right side heading will be Assets and left side heading will be liabilities. We write all assets in right side and all liabilities in left side.

2. All assets are divided in sub-parts. Fixed assets and current assets and intangible assets. Cash in the bank, accounts receivable, petty cash funds, inventory, prepaid expenses and outstanding incomes are current assets.  Prepaid expenses are paid in advance but we did not get services. So, it is our current assets because we have to take benefit from this asset. Prepaid expenses may be fixed asset, if we have to get the service more than one year. Like advance payment for machinery maintenance for 10 years.

Land, building, plant, machinery, vehicle, furniture and other equipment are main fixed assets. We take its benefits more than one year.

Intangible assets are those which we can not touch. We can just feel. If your online business will be successful, its goodwill value will increase. You will get the price of its goodwill when you sell your online business to next party. So, goodwill is intangible asset. Like this, there are lots of intangible assets which we have to show in the assets side of balance sheet.

 Important Note: 

a) Some business organisation may have also different investments, so we write in assets side of balance sheet

b) We have to deduct depreciation from fixed assets and provision for bad debts from sundry debtors.

3. After understanding all assets, we have to understand different liabilities. Liabilities are also fixed and current. We can also say long term liabilities and short term liabilities.  Short-term liabilities may include accounts payable, payroll taxes payable, sales taxes payable, Bill payables,  customer deposits on work in process, or security deposits made to your business, outstanding expenses and advance incomes.

Long term loan will be our fixed liabilities. Loan from bank, issue of debentures and deposit of public may include in it.

4. Equity or capital is the excess of all assets over outside liabilities. We include our net profit in it. We deduct drawing from it. If you are doing company type business. This value will show the equity share capital and pref. share capital. We will make separate heading of reserves and surplus for showing our old reserve and current year profits in liability side of balance sheet.

 Important Note: 

a) We make profit and loss appropriation account for showing current year reserve and retained earning in reserve and surplus of balance sheet of company.

b) We also show all types of capital (like authorized capital, called up and paid up) in balance sheet of company. But only paid up capital will be the part of total liabilities of balance sheet.


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Accounting Education: How to Understand Balance Sheet Statement
How to Understand Balance Sheet Statement
Accounting Education
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