Balance Sheets Conclusion

Balance Sheets Conclusion

Balance Sheets Conclusion

From the foregoing you will have observed that:

(a)A balance sheet is a method of recording the financial position of a business at a particular date.

(b)If all transactions are correctly recorded, the liabilities must balance with the assets all the time.

(c)There are six types of transactions:

(i)Balancing (equalising) asset with liability; An entry on the assets side (e.g., cash at bank of £5,000) must be matched by an equal entry on the liabilities side (e.g., capital 91 £5,000).

(ii)Balancing liability with asset: An entry on the liabilities side (e.g., bank loan, £4,000) must be matched by an equal entry on the assets side (e.g., freehold property, £4,000).

(iii)Exchange asset for asset: Introducing an asset (e.g., equipment, £3,000) and at the same time reducing another asset by an equal amount (e.g., cash at bank, from £5,000 to £2,000). This does not alter the total assets, and therefore nothing is entered on the liabilities side to balance it. All that has happened is the exchange of one form of asset (cash) for another.

(iv)Exchange liability for liability: Introducing a liability

(e.g., future taxation provision, £500) and at the same time reducing another liability (e.g., profits retained, from £1,500 to £1,000) does not alter the total liabilities and therefore nothing is entered on the assets side to balance it. There has merely been the exchange of one form of liability (part of profits retained) for another (provision for future taxation).

(v)Increasing assets by profits (e.g., stock costing L500 sold for £2,000, thus increasing cash at bank by £2,000 and the total assets by £1,500).

(vi)Decreasing assets by losses (e.g., should deteriorating stock costing £500 be sold for, say, £200).

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Next - Consolidated Profit And Loss Account



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