Balance Sheet is a financial statement that provides a snapshot of a business’s financial position at a particular point in time. It presents the assets, liabilities, and owner’s equity of a business. The balance sheet follows the fundamental accounting equation:
Assets = Liabilities + Owner’s Equity
In a sole proprietorship, the Owner’s Equity represents the owner’s claim against the business’s assets after all liabilities have been deducted.
The balance sheet is divided into two sections:
- Assets (on the left side)
- Current Assets
- Non-current Assets (Fixed Assets)
- Liabilities and Owner’s Equity (on the right side)
- Current Liabilities
- Non-current Liabilities
- Owner’s Equity
Structure of the Balance Sheet:
- Assets
- Current Assets: These are assets that are expected to be converted into cash or used up within a year.
- Cash
- Accounts Receivable
- Inventory
- Prepaid Expenses
- Non-Current Assets (Fixed Assets): These are assets that are expected to provide benefits for more than one year.
- Land and Building
- Machinery
- Furniture and Fixtures
- Vehicles
- Current Assets: These are assets that are expected to be converted into cash or used up within a year.
- Liabilities
- Current Liabilities: These are obligations that the business is expected to settle within a year.
- Accounts Payable
- Short-Term Loans
- Accrued Expenses
- Non-Current Liabilities: These are long-term obligations that are due after one year.
- Long-Term Loans
- Mortgages
- Current Liabilities: These are obligations that the business is expected to settle within a year.
- Owner’s Equity: This represents the owner’s investment in the business, including capital invested, retained earnings, and withdrawals.
- Capital
- Retained Earnings
Example of Balance Sheet for a Sole Proprietorship
Let’s assume the following balances at the end of the financial year for a sole proprietorship business:
- Assets:
- Cash: ₹25,000
- Accounts Receivable: ₹15,000
- Inventory: ₹30,000
- Prepaid Expenses: ₹5,000
- Land and Building: ₹50,000
- Machinery: ₹20,000
- Furniture and Fixtures: ₹10,000
- Vehicles: ₹15,000
- Liabilities:
- Accounts Payable: ₹12,000
- Short-Term Loan: ₹10,000
- Long-Term Loan: ₹30,000
- Owner’s Equity:
- Capital: ₹100,000
- Retained Earnings: ₹18,000
Step 1: Prepare the Balance Sheet
Particulars | Amount (₹) | Amount (₹) |
---|---|---|
Assets | ||
Current Assets | ||
Cash | 25,000 | |
Accounts Receivable | 15,000 | |
Inventory | 30,000 | |
Prepaid Expenses | 5,000 | |
Total Current Assets | 75,000 | |
Non-Current Assets (Fixed Assets) | ||
Land and Building | 50,000 | |
Machinery | 20,000 | |
Furniture and Fixtures | 10,000 | |
Vehicles | 15,000 | |
Total Non-Current Assets | 95,000 | |
Total Assets | 170,000 | |
Liabilities | ||
Current Liabilities | ||
Accounts Payable | 12,000 | |
Short-Term Loan | 10,000 | |
Total Current Liabilities | 22,000 | |
Non-Current Liabilities | ||
Long-Term Loan | 30,000 | |
Total Liabilities | 52,000 | |
Owner’s Equity | ||
Capital | 100,000 | |
Retained Earnings | 18,000 | |
Total Owner’s Equity | 118,000 | |
Total Liabilities and Equity | 170,000 | 170,000 |
Explanation of the Balance Sheet
- Assets:
- Current Assets: These are liquid assets or assets that are expected to be converted into cash or used up in the business’s normal operating cycle within a year.
- Cash: ₹25,000 – The cash held by the business.
- Accounts Receivable: ₹15,000 – Amounts due from customers for sales made on credit.
- Inventory: ₹30,000 – The value of goods held for resale.
- Prepaid Expenses: ₹5,000 – Expenses that have been paid in advance but will be used up within the year.
- Non-Current Assets (Fixed Assets): These are long-term assets that the business uses in its operations and are not intended to be sold or converted into cash within a year.
- Land and Building: ₹50,000 – The value of property owned by the business.
- Machinery: ₹20,000 – The value of machinery used in operations.
- Furniture and Fixtures: ₹10,000 – The value of office furniture and fixtures.
- Vehicles: ₹15,000 – The value of business vehicles.
- Current Assets: These are liquid assets or assets that are expected to be converted into cash or used up in the business’s normal operating cycle within a year.
- Liabilities:
- Current Liabilities: These are obligations the business is required to settle within a year.
- Accounts Payable: ₹12,000 – Amounts owed to suppliers for goods or services received.
- Short-Term Loan: ₹10,000 – Loan that needs to be repaid within a year.
- Non-Current Liabilities: These are long-term obligations that do not need to be paid within the next 12 months.
- Long-Term Loan: ₹30,000 – Loan payable over a period longer than one year.
- Current Liabilities: These are obligations the business is required to settle within a year.
-
Owner’s Equity: Represents the owner’s claim on the business after all liabilities are paid off.
- Capital: ₹100,000 – The initial investment by the owner in the business.
- Retained Earnings: ₹18,000 – The accumulated profit not distributed to the owner as drawings, retained for reinvestment in the business.