A balance sheet is the most important financial document of a company, which simply represents a detailed listing of the company’s assets and liabilities.
Assets are anything that the business owns. We tend to consider assets to be land, buildings, vehicles, inventory and cash but they are also other things. The adding machines, computers, copyrights, patents, goodwill, time clocks, pens, wrenches, ladders, paper and copy machines are also included. This expands the definition to encompass all that the business has acquired by purchase or by owner contributions.
Assets can be of three types: Fixed Assets, Floating Assets and Fictitious Assets
Liabilities – when doing accounting – on the other hand, are claims against the assets excluding the owner’s equity contributions. The structure is determined in the balance sheet format which should be followed. These claims can take several forms. Some are both short- and long-term loans, bills for utilities, rent, employee expenses, bonds, taxes and many other items.
They reduce the total value of the assets. Interestingly, liabilities are very liquid. They change on a constant basis. For instance, widgets are purchased to sell, the business uses utilities to operate and cash or credit is needed to pay these outside.
Liabilities are of three types: Fixed Liabilities, Current Liabilities and Contingent Liabilities
To equate assets and liabilities , balance sheet template has two sides-the left-hand side and the right-hand side. These two sides, however, are not comparable with the debit side and credit side of a ledger account because balance sheet is not an account. Words ‘To’ or ‘By’ are not used in the balance sheet The left-hand side is liabilities side and contains credit balances of all real and personal accounts and on the right-hand side which is “assets” side, are listed the debit balances of real and personal accounts.
Arrangement of Assets and Liabilities in Balance sheet
The assets and liabilities should be arranged in balance sheet in some specific order. Arrangement of assets and liabilities in the balance sheet is called ‘Marshalling of assets and liabilities’. There are two systems of arrangement of assets and liabilities in the balance sheet:
(a) Order of Liquidity.
(b) Order of Permanence.
In liquidity order most easily realizable assets are shown at the top and then these are followed by assets which are less easily resalable. So, the assets most difficult of realization will be shown at the bottom. In case of liabilities, these will be shown in the order in which they are payable – the most pressing liability comes first.