Friday, 12 December 2014

How to prepare Balance Sheet and its Importance

What is a Balance Sheet?
A Balance Sheet is one of the most important documents of any company. It is a summary of all the accounts and activities of the company in money value. It is a statement of the assets and liabilities of the company. It gives a complete picture of the financial position of any company in a nutshell. 

Importance of Balance Sheet
Balance sheets are important for the many uses they provide to different sections of people. They are mandatory under the Company Law for any business organization.

  • Balance Sheets are used by governments and Company Law Boards to determine the performances of companies or business entities for the purpose of Income Tax assessment, Corporate Tax, and other statutory compliance requirements. 
  • Investors use the information from Balance Sheets as a guide for their investments in the company. As the balance sheets are certified by licensed Chartered Accountants, they are considered as true and reliable sources projecting true picture of the company's financial position. 
  • Owners and Shareholders use the balance sheets to know the status of the company and to take authoritative decisions on management issues and for the running of the companies.
  • Even staff and workers require the balance sheets to know the progress of the company and for seeking increments, promotions and bonus payments.
  • In legal field also. balance sheets are used to file cases and seek compensations from the company. 
How to prepare Balance Sheets?
Balance Sheet is prepared with the help of Trial Balance and Profit and Loss Statement of the company.

A simple Balance Sheet consists of two columns just like Trial Balance and Profit and Loss account.
On your right side, you will take all the assets which include Fixed Assets, Current Assets, Cash & Bank Balances, and Investments, etc. On the left side, you will show all your liabilities such as Capital, long-term liabilities, current liabilities, etc.

Different countries follow different styles in presentations. Some prefer a single column statement starting with assets and then proceed to liabilities and capital. The asset total is inserted in the midst and the liabilities total at the end. In any case, both assets and liabilities will tally in their total amount. That is why it is known as a Balance Sheet.

Even in the same country, different companies can project their figures in different ways. Say, Cash and Bank balances and current assets first then fixed assets like that. And current liabilities first and then long-term liabilities and then Share capital.

But, in my example below, I am giving a sample balance sheet in a simple format that I used to prepare for my company in a two columnar statement.

Balance Sheet of XYZ Company as on 31st March 2014
Amount ($)
Amount ($)
Authorised Capital
CP shares 200000
Ordinary    50000
Total         250000

Issued & Paid-Up
CP shares 180000
Ordinary     45000

Fixed Assets 200000

Less:Depreciation                                                         30000         



Sundry Debtors

Prepaid expenses


Bank Balance
Total Issued & Paid
Cash Balance
Long-term Liabilities

Current Liabilities

Cumulative Profit


The above is only a sample for easy understanding of Balance Sheet preparation. All figures are to be taken from your Profit and Loss Statement and Trial Balance which is finally confirmed as correct figures.

You need to attach with this Balance Sheet all the quantitative information and the details of each group of account shown here in the above statement. These sheets of information are to be enclosed as Annexures to the Balance Sheet.

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