Points to Be Considered Before Creating Balance Sheet:

There are few points that should be kept in mind before creating a balance sheet:

Importance of Trial balance: Before preparing the balance sheet, a firm needs to create the trial balance. All entries in the trial balance will finally tally at the end. Those are recorded in the balance sheet. If the trial balance fails to tally then the excess balance will be written under suspense account then appears to balance sheet. The balance sheet will have all accounts exactly as they are in trial balance i.e. debit and credit entries of trading account, profit and loss account will come in debit and credit sides of the balance sheet.
Common entries in balance sheet: There are some common entries that appear in the debit or credit side always, such as:

Direct expenses and indirect expenses appear in trading account and Profit and Loss account. They are tallied in the balance sheet exactly as they were in the first place.
Direct expenses such as factory expenses are written under the debit side of trading account.
Indirect expenses such as office expenditure are written under the debit side of Profit and Loss account.
There are other expenses such as rent, discount or interest that are paid in favor of the production. These are written under the debit side of Profit and Loss account. In other cases, if these amounts are received then they are written under credit side of the Profit and Loss account.

Here is one of the sample Trial Balance and Balance Sheet from the books of Mahinder Singh, prepare Trading and Profit & Loss Ale for the year ending March 31st, 2004 and the Balance sheet as on that date.

Name of Account Debit Credit

Balances Balances

Drawing and Capital 20,000 1, 99,000

Plant & Machinery 80,000

Debtors & creditors 70,000 50,000

Purchases and sales 1, 10,000 2, 20,000

Returns 10,000 7,000

Wages 40,000

Cash in hand 5,000

Cash at Bank 10,000

Salaries 30,900

Repairs 8,000

Stock 45,000

Rent 10,000

Manufacturing Expenses 7,000

Bill receivable 12,000

Bill Payable 20,000

Bad debts 5,000

Carriage 9,000

Furniture 15,000

Income tax 10,000

4,96,000 4,96,000

Closing stock was valued at $ 50,000.

Solution.

Trading and Profit and Loss Account

Dr. Cr.

Expenses/Losses Amount Revenue/Gain Amount

$ $.

To Opening Stock 45,000 By Sales 2,20,000

To Purchases 1,10,000 Less : Returns 10,000 2, 10,000

Less : Returns 7,000 1,03,000 By Closing stock 50,000

To Manufacturing Expenses 7,000

To Carriage 9,000

To Wages 40,000

To Gross Profit c/d 56,000

2,60,000 2,60,000

To Salaries 30,000 By Gross Profit b/d 56,000

To Repairs 8,000

To Rent 10,000

To Bad debts 5,000

To Net Profit transferred to Capital A/c 3.000

56,000 56,000

Balance Sheet

Liabilities Amount Assets Amount

$ $

Capital 1,99,000 Plant & Machinery 80,000

Add : Net Profit 3,000 Furniture 15,000

2,02,000 Bills receivable 12,000

Less : Drawings 20,000 Sundry Debtors 70,000

1,82,000 Closing stock 50,000

Less : Income tax 10,000 1,72,000 Cash at bank 10,000

Sundry creditors 50,000 Cash in hand 5,000

Bills payable 20,000

2,42,000 2,42,000

Here, one must remember that Drawings, debtors, returns etc. falls under debit side of the trial balance and Capital, creditors and also returns etc. falls under the credit side of the trial balance. These entries are collected from their respected sides only.

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