Unit-17 Balance Sheet

Learn about the Balance Sheet which is prepared for ascertaining the financial position of the business as at the end of an accounting year.

How would you classify various assets and liabilities? Explain with suitable examples.

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Learning Pundits Content Team

Written on Jun 26, 2019 12:18:14 PM

Assets may be classified into various categories as follows.

Current Assets: Assets which are held for purposes of resale, consumption or conversion into cash as early as possible are called current assets. Examples of such assets are Stocks of Raw Materials, Partly Finished Goods, Finished Goods, Bills Receivable, Sundry Debtors, Short-term Investments, etc. The current assets are also called 'Floating Assets' since they constantly change by business operations. Cash in hand and cash at bank are also included in current assets.

Liquid Assets: These are assets which are already in the form of cash or which are convertible into cash quickly. Examples are Cash in hand, Cash at bank.

Fixed Assets: Assets which are acquired for use in the business over a long period are called fixed assets. They are held more or less permanently for the purpose of earning revenue and are not meant for resale. Land, Buildings, Plant and Machinery, Furniture and Fixtures are some of the examples of fixed assets. The fixed assets of a concern are collectively called 'Block'.

Tangible Assets: Tangible assets are those assets which can be seen and touched. Land, Building, Stock of Goods, Cash, etc., are some examples of tangible assets.

Intangible Assets: Intangible assets are those assets which cannot be seen and touched e.g., Goodwill, Patents, Copyrights, Trade Marks, etc. These are in the form of rights represented by some documents. Note that these assets have value although without physical form.

Wasting Assets: Natural resources such as oil wells, mines, quarries, etc., which get exhausted after extraction of their contents are called wasting assets. A mine becomes valueless as soon as all the minerals have been extracted.

Fictitious Assets: These are the assets not represented by any tangible or intangible property. They are shown as assets in the Balance Sheet simply because their accounts show debit balances. They usually represent unwritten off expenses and losses. For example, expenses incurred at the time of formation of a company (called preliminary or formation expenses) are not charged in full to Profit and Loss Account in the same year in which they are incurred. The unwritten off portion of such an expense will be shown as an asset in the Balance Sheet. Other examples of fictitious assets are: discount on issue of shares or debentures, expenditure on advertising campaign or any other deferred revenue expenditure.

The term 'liabilities' covers the amount due to creditors and the amount owing to the proprietor (capital). Hence, liabilities of a business may be broadly classified into two categories.

  1. Liabilities to the proprietor
  2. Liabilities to outsiders

Liabilities to the proprietor refer to the claims of the proprietor in the form of capital and reserves (undistributed profits). They are also called 'Proprietor's Equity'.

Liabilities to outsiders are the amounts owing to various creditors such as creditors for goods supplied, loan on mortgage, bills payable, etc. They are also referred to as 'Outsiders' Equity'.

Liabilities to outsiders may be sub-divided into (a) short-term liabilities, and (b) long-term liabilities.

a.Short-term Liabilities: Liabilities which are payable in the near future, usually within one year from the date of the Balance Sheet, are called short-term liabilities. Bills payable, creditors for goods supplied, bank overdraft are some of the examples of short-term liabilities. They are also called 'current liabilities‘.

b.Long-term Liabilities: These are the liabilities which are not to be paid in the near future. They are to be paid after a long period of time such as loans taken on mortgage of assets, fixed deposits accepted by a concern, debentures issued by a company. etc. Thus, all liabilities other than short-term liabilities fall into this category. They are also called 'fixed liabilities'.

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