Balance Sheet - Last Stage in Final Accounts:

Asset	$	Liabilities and Capital	$.

Classification of Assets:

Assets may be classified as follows:

Real Assets:

Assets which have some market value are called real assets, e.g. building, machinery, stock, debtors, cash, goodwill, etc. Real assets are further divided into two types according to their permanence:

Fixed Assets: Assets which have long life and which are bought for use for a long period of time are called "fixed assets". These are not bought for selling purposes, e.g. land, building, plant, machinery, furniture etc. Fixed assets are again sub-divided into two:

1. Tangible Assets: Assets which have physical existence and which can be seen, touched and felt are called "tangible assets", e.g. building, plant, machinery, furniture etc.

2. Intangible Assets: Assets which have no physical existence and which cannot be seen, touched or felt are called "intangible assets", e.g. goodwill, patent right, trade mark etc.

Current Assets: Assets which are short-lived and which can be converted into cash quickly to meet short term liabilities are called "current assets", e.g. stock debtors, cash etc. Such assets change their form repeatedly and so, they are also known as circulating or floating assets. For example, on purchase of goods cash is converted into stock and on sale of goods, stock is converted into debtors, on collection from debtors, debtors take the form of cash etc.

Out of current assets those which can be converted into cash very quickly or which are already in the form of cash are called liquid or quick assets e.g. debtors, cash in hand, cash at bank etc.

Fictitious Assets: Assets which have no market value are called fictitious assets. examples of fictitious assets include preliminary expenses, loss on issue of shares etc. They are also known as nominal assets.

Besides these, there is another type of assets whose value gradually reduce on account of use and finally exhaust completely. This type of assets is called wasting assets e.g. mine, forest etc.

Classification of Liabilities:

Internal Liabilities:

The total amount of debts payable by a business to its owner is called internal liability e.g. Owner's equity (capital), reserve etc. From practical view point internal liabilities should not be regarded as liabilities, since there is no question of meeting such liabilities al long as the business continues.

External Liabilities:

All debts payable by a business to the outsiders (other than the owner) are called external liabilities e.g. creditors, debentures, bills payable, bank overdraft, etc. External liabilities are further divided into two.

Fixed or Long Tern Liabilities: The liabilities which are payable after a long period of time are called fixed or long term liabilities e.g. debentures, loan on mortgage etc.

Current or Short Term Liabilities: The debts which are repayable within a short period of time are called current or short-term liabilities e.g. creditors, bills payable, bank overdraft etc. Current liabilities may again be divided into two:

1. Deferred Liabilities: Debts which are repayable in the course of less than one year but more than one month are called deferred liabilities e.g. Short term loan etc.

2. Liquid or Quick Liabilities: Debts are repayable in the course of a month are called liquid or quick liabilities e.g. bank overdraft, outstanding expenses, creditors etc.

Besides the above, there is another type of liability which is known as contingent liability. It is one which is not a liability at present, but which may or may not become a liability in in future. It depends upon certain future event. For example, suppose, the buyer of goods filed a suit in the court against the seller claiming damage of $10,000 for breach of contract. This will be regarded as a contingent liability to the seller until the receipt of the court's order. To the buyer, this is a contingent asset. Both contingent liability and contingent asset are not recorded in the balance sheet. They are generally mentioned in the balance sheet as a note.

Grouping and Marshaling of Assets and Liabilities in Balance Sheet:

As we have discussed that the main purpose of balance sheet is to disclose a true and fair financial position of a business on a particular date. So, the assets and liabilities must be shown in such a manner that the financial position of the business can be assessed through it easily and quickly. Thus an arrangement is made in which assets and liabilities are shown in the balance sheet. Such an arrangement is called marshaling of assets and liabilities. There are three methods of marshaling:

1. Permanency Preference Method

2. Liquidity Preference Method

3. Mixed Method

These methods of preparing a balance sheet are briefly explained below:

Permanency Preference Method:

Under this method, the assets and liabilities are shown in balance sheet in the order of their permanence. In other words, the more permanent the assets and liabilities, the earlier are they shown. This method is adopted by joint stock companies and under this method the balance sheet will take the following form:

Balance Sheet as at.....

Assets	$	Liabilities	$
Fixed Assets:      Good will      Patent      Land      Building      Plant & Machinery      Furniture & Fixtures Current Assets:      Investment      Stock      Sundry debtors      Bills receivable      Prepaid expenses Liquid Assets:      Cash at bank      Cash in hand		Fixed Liabilities:      Capital      Reserves      Long term loans Current Liabilities:      Sundry creditors      Bills payable      Bank overdraft      Outstanding expenses

Liquidity Preference Method:

Under this method, assets and liabilities are shown in order of their liquidity. The more liquid the assets, the earlier are they shown. The sooner the liabilities are to be paid off, the earlier are they shown. This method is adopted by sole proprietorship and partner ship business. Under this method the form of balance sheet is:

Balance Sheet as at.....

Assets	$	Liabilities	$
Liquid Assets:      Cash at bank      Cash in hand Current Assets:      Investment      Stock      Sundry debtors      Bills receivable      Prepaid expenses Fixed Assets:      Good will      Patent      Land      Building      Plant & Machinery      Furniture & Fixtures		Current Liabilities:      Sundry creditors      Bills payable      Bank overdraft      Outstanding expenses Fixed Liabilities:      Capital      Reserves      Long term loans

(Liquidity preference method is exactly reverse of the first method)

Mixed Method:

Under this method, assets are shown in the order of permanence and liabilities are shown in order of liquidity. This method is adopted by banks and insurance companies etc.

»	Definition and Explanation of Final Accounts
»	Trial Balance - A Starting Point for Final Accounts
»	Meanings and Sources of Revenue
»	Direct and Indirect Expenses
»	Matching Revenue and Expenses
»	Trading Account
»	Profit and Loss Account
»	Difference between Trading Account and Profit and Loss Account
»	Difference between Gross Profit and Net Profit
»	Balance Sheet
»	Difference between Trial Balance and Balance Sheet
»	Example of Trading and Profit and Loss Account and Balance Sheet