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Balance Sheet – Introduction

The Balance Sheet shows the financial position of a business at a specific point in time.

Why is it important?

  • Displays Assets, Liabilities, and Equity.
  • Helps assess solvency and liquidity.
  • Required for statutory reporting and loan applications.

When is it prepared?

  • At the end of the accounting period, after the Profit & Loss Account.
  • Represents the closing financial position.

Structure

SectionItems
AssetsCurrent Assets (Cash, Debtors, Stock) and Fixed Assets (Land, Buildings, Machinery)
LiabilitiesCurrent Liabilities (Creditors, Short‑term loans) and Long‑term Liabilities (Mortgage, Bonds)
EquityCapital, Reserves, Retained Earnings

Accounting Equation

Assets = Liabilities + Equity

Example (Indian Context)

XYZ Manufacturing Ltd. – Balance Sheet (31‑Mar‑2025)

Assets₹
Cash & Bank1,20,000
Debtors80,000
Closing Stock1,10,000
Fixed Assets (Net)5,00,000
Total Assets8,10,000
Liabilities & Equity₹
Creditors60,000
Short‑term Loans40,000
Long‑term Loan2,00,000
Capital (incl. Reserves)3,00,000
Retained Earnings (Net Profit)1,10,000
Total Liabilities & Equity8,10,000

Key Points

  • Assets must equal Liabilities + Equity.
  • Current assets are expected to be converted to cash within a year.
  • Equity reflects owners' stake after liabilities.

Common Mistakes

  • Forgetting to include Closing Stock as an asset.
  • Misclassifying Long‑term loans as current liabilities.
  • Not balancing the sheet (assets ≠ liabilities + equity).

Quiz

Test Your Knowledge

Question 1 of 3

1. The Balance Sheet shows the financial position at:

End of the period
Beginning of the period
Mid‑year
Any random date

💡 Final Wisdom: "Balance Sheet is a snapshot – if it’s not balanced, something’s missing. Double‑check every asset and liability!"

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