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:

1. 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.
2. Direct expenses such as factory expenses are written under the debit side of trading account.
3. Indirect expenses such as office expenditure are written under the debit side of Profit and Loss account.
4. 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.

 

Links of Previous Main Topic:-

• Balance sheet in final accounts without adjustments
• Difference between profit and loss accounts and balance sheet
• Features or characteristics balance sheet
• Limitations of final accounts or financial statements
• Meaning of financial statements or final accounts
• Need or importance and purpose of trading account
• Need or purpose and importance of profit and loss account
• Performa of balance sheet
• Performa profit loss account
• Performa of trading account

Links of Next Accounting Topics:-

• Profit and loss account final accounts without adjustments
• Trading account final accounts without adjustments
• Bills of exchange concept of bills of exchange
• Errors affecting or disclosed by trial balance introducing the concept
• Meaning of depreciation