by Balance Sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. For a proprietary concern, it includes the owner’s capital, liabilities, and assets, showing the financial health of the business.
When preparing the balance sheet, depreciation plays a vital role in adjusting the value of long-term assets such as machinery, buildings, or equipment. Depreciation reduces the book value of these assets over time, reflecting their usage and aging.
XYZ Proprietary Concern Balance Sheet As of December 31, 2024
| Liabilities | Amount ($) | Assets | Amount ($) |
| Owner’s Equity and Liabilities | – | Assets | – |
| Capital Account | – | Fixed Assets | – |
| Opening Capital | 300,000 | Property, Plant & Equipment (PPE) | 600,000 |
| Add: Net Profit | 154,400 | Less: Accumulated Depreciation | (100,000) |
| Less: Drawings | (20,000) | Net PPE | 500,000 |
| Net Capital | 434,400 | – | – |
| – | – | Current Assets | – |
| Non-Current Liabilities | – | Cash and Cash Equivalents | 60,000 |
| Long-Term Loans | 150,000 | Accounts Receivable | 75,000 |
| – | – | Inventory | 90,000 |
| Current Liabilities | – | Prepaid Expenses | 10,000 |
| Accounts Payable | 40,000 | Total Current Assets | 235,000 |
| Short-Term Loans | 30,000 | – | – |
| Accrued Expenses | 15,000 | – | – |
| Total Current Liabilities | 85,000 | – | – |
| – | – | Total Assets | 735,000 |
| Total Liabilities | 669,400 | – | – |
Explanation of Key Figures
- Capital Account:
- Opening Capital is the owner’s investment at the beginning of the period.
- Net Profit is derived from the Statement of Profit and Loss.
- Drawings represent the amount withdrawn by the proprietor for personal use, which reduces the capital.
- The resulting Net Capital after adding net profit and deducting drawings shows the proprietor’s updated equity.
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Non-Current Liabilities:
- These include long-term loans that extend beyond one year. This is a financial obligation that the business needs to repay in the future.
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Current Liabilities:
- Accounts Payable includes outstanding payments due to suppliers.
- Short-Term Loans are debts that must be repaid within the current year.
- Accrued Expenses are expenses that have been incurred but not yet paid, such as wages or utility bills.
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Fixed Assets (after Depreciation Adjustment):
- The gross value of fixed assets (e.g., machinery, equipment, property) is listed before depreciation.
- Accumulated Depreciation represents the total depreciation charged over the years, reducing the value of the fixed assets. In this case, $100,000 is deducted from the gross value of $600,000 to reflect the wear and tear.
- The net value of PPE (property, plant, and equipment) after adjusting for depreciation is shown as $500,000.
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Current Assets:
- Cash and Cash Equivalents represent the liquid cash available in the business.
- Accounts Receivable are amounts owed to the business by customers for goods or services delivered.
- Inventory represents goods available for sale or production.
- Prepaid Expenses are payments made in advance for services to be received in the future, such as insurance premiums.
Adjusting for Depreciation
Depreciation is crucial for adjusting the value of fixed assets. In the example above:
- Gross Value of PPE = $600,000
- Less Accumulated Depreciation = $100,000
- Net PPE = $500,000
This adjustment ensures that the balance sheet reflects the accurate current value of the assets. Depreciation reduces the reported value of assets but does not affect cash flow. By deducting accumulated depreciation, the business presents a more realistic financial position to stakeholders.
