Closing Balance Sheet (when Opening Balance Sheet is given)

Closing Balance Sheet is prepared at the end of an accounting period, showing the financial position of an organization. It provides a snapshot of assets, liabilities, and equity at a specific point in time. When the Opening Balance Sheet is provided (i.e., the Balance Sheet at the beginning of the period), the Closing Balance Sheet is prepared by adjusting for transactions that occurred during the period.

Steps for Preparing the Closing Balance Sheet:

1. Start with the Opening Balance Sheet

Opening Balance Sheet shows the financial position at the beginning of the accounting period. It lists all the assets, liabilities, and equity (capital) balances at that time.

2. Account for Changes in Assets and Liabilities

During the period, certain transactions affect the balances of assets and liabilities. These changes:

• • Purchase or Sale of Assets: If the organization purchases or sells fixed or current assets, adjust the opening balance accordingly.
  • Accrual of Income and Expenses: Adjust income and expenses to reflect any outstanding amounts (e.g., unpaid expenses, accrued income).
  • Depreciation: Deduct depreciation on fixed assets to adjust their book values. Depreciation reduces the carrying value of assets.
  • Increase or Decrease in Liabilities: Include any new borrowings or repayments that affect the liabilities. For example, loans taken or repaid, creditors paid, etc.

3. Account for Changes in Capital/Equity

The opening capital or equity balance is adjusted based on:

• • Profits or Losses: The profit or loss from the Income and Expenditure Account (for not-for-profit organizations) or Profit and Loss Account (for business organizations) should be added to or subtracted from the opening capital.
  • Additional Investments: Any new capital introduced during the period should be added to the capital.
  • Withdrawals/Drawings: If any withdrawals were made by the owner(s) (in the case of sole proprietorships or partnerships), they should be subtracted from the equity or capital account.

4. Prepare the Closing Balance Sheet

After adjusting for all the transactions, you can now prepare the Closing Balance Sheet. It consists of two main parts:

1. 1. Assets: This includes both current assets (like cash, inventory, receivables) and non-current assets (like buildings, machinery, vehicles).
   2. Liabilities: This includes both current liabilities (like creditors, bills payable) and non-current liabilities (like long-term loans).
   3. Capital/Equity: This represents the owner’s or partner’s equity in the business.

Example of Closing Balance Sheet

Let’s assume that the Opening Balance Sheet for a partnership firm is provided, and certain transactions occurred during the period.

Opening Balance Sheet (01 January 2024)

Transactions during the period:

1. The firm sold machinery worth ₹3,000.
2. The firm purchased new machinery for ₹8,000.
3. Depreciation of ₹2,000 was charged on machinery and furniture.
4. Capital A introduced an additional ₹5,000 in the firm.
5. The firm paid ₹1,000 to creditors.

Adjusted Closing Balance Sheet (31 December 2024)

1. Capital Accounts:
   • Capital A = ₹50,000 + ₹5,000 (additional capital) = ₹55,000.
   • Capital B = ₹30,000 (no change).
2. Assets:
   • Cash in Hand = ₹5,000 (no change).
   • Bank Balance = ₹20,000 (no change).
   • Machinery = ₹15,000 (Opening) – ₹2,000 (depreciation) + ₹8,000 (purchase) – ₹3,000 (sale) = ₹18,000.
   • Furniture = ₹10,000 – ₹2,000 (depreciation) = ₹8,000.
3. Liabilities:
   • Long-term Loan = ₹10,000 (no change).
   • Creditors = ₹5,000 – ₹1,000 (payment) = ₹4,000.

Closing Balance Sheet (31 December 2024)