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TOPIC: BALANCE SHEET

  • (i) MEANING OF BALANCE SHEET
  • (ii) ITEMS ON A BALANCE SHEET
  • (iii). USES OF BALANCE SHEET
  • (Iv). CLASSIFICATION OF ITEMS IN THE BALANCE SHEET
  • (v). DISTINCTION BETWEEN CAPITAL AND LIABILITIES
  • (vi) DIFFERENTIATION BETWEEN VERTICAL AND HORIZONTAL BALANCE SHEET.

Sub-topic 1 (i) Meaning of Balance Sheet

Balance Sheet is the financial position of an organization at any given point of time, e.g it shows what a business owns, (asset) those it owes, (liabilities) and the net worth (capital).

(ii) Items on a Balance Sheet

Items on a Balance Sheet are (1) Assets e.g Plants and Machinery, Motor Vehicle, Land and Building, Freehold Premises, Furniture and Fitting, Stock, Cash, Debtor, Bank, Goodwill and prepayment.                                                                                           (2) Liabilities e.g Debenture, Long term loan, Short term loan, Overdraft, Creditors and accrued expenses.                                                                                                                                                                                                                                                                                                      (3) Capital = Net Profit – drawing.

(iii). Uses of Balance Sheet

(i). It provides information to prospective investors.

(ii) It gives the financial summary of a business.

(iii).It reveals the working capital of a business.

(iv).It indicates the liquidity position of an organization.

(v).It portrays the source of capital of a business.

(vi)  It presents statement of fixed and current assets, and shows current and long term liability.

(iv). Classification of items in the Balance sheet.

  • Fixed Assets: Plants and Machinery, Motor Vehicle, Land and Building, Freehold Premises, Furniture and Fitting and Goodwill.
  • Current Assets: Stock, Cash, Debtor, Bank and prepayment.
  • Long term Liabilities: Capital, net profit less drawing, Debenture and mortgage.
  • Current Liabilities: Loan, overdraft, Creditors and accrued expenses.
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(v). Distinction between Capital and Liabilities

Capital is cash or fund set aside for further wealth, or amount of money invested to the business while liabilities are those the business is indebted to.

(vi) Differences between Horizontal and Vertical balance Sheet.

  • Assets are shown on the right and liabilities on the left hand side while in vertical balance sheet assets are shown at the top and then capital and liabilities are shown underneath instead of side by side.
  • One need knowledge of accounting to understand the Balance Sheet while vertical Balance Sheet is easier to understand.

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