Page 106 - Office Practice and Accounting 10

• To know about strength and weakness of the business
• To make easy borrowing of funds and loan
• To formulate plans and policies

• To help the management for decision making process
• To complete an accounting cycle
• To provide the data for financial analysis

Advantages and importance
The advantages and importances of balance sheet are listed as follows:
i. It helps to know the financial position of a firm.
ii. It provides the information about assets, liabilities and capital.
iii. It helps to test the liquidity, solvency, efficiency and profitability of the business.
iv. It helps to know the strength and weakness of the business.
v. It helps to fix the purchase consideration of the business.
vi. It helps to provide data and information for decision making process.
vii. It helps to formulate plans and policies for business issues.

Items to be recorded in balance sheet (Assets and Liabilities)

1. Assets

i. Current assets: Cash and the assets which can be converted into cash within
one year are called current assets. Bank balance, marketable securities, debtors,
closing stock, prepaid expenses, short-term investment, accrued income, all
receivables, etc. are current assets. Currents assets are of two types liquid
assets and non-liquid assets. Liquid assets are those that can be converted into
cash when ever needed within one year without any loss. Cash, bank, debtors,
marketable securities, etc. are liquid assets and non-liquid assets can be
converted into cash within one year but exact value may or may not be realised.
Closing stock, prepaid (advance) expenses etc. are non-liquid assets.
ii. Fixed assets: Assets which last more than one year are known as fixed assets.
Furniture, land and building, vehicle, machinery are the examples of fixed
assets.
iii. Fictitious assets: Assets which do not have physical shape but give the benefit
to the firm are known as fictitious assets. Preliminary expenses, goodwill,
patent, underwriting commission, copy right, etc are fictitious assets. They are
also termed as nominal assets and intangible assets.
iv. Investment: Investment is an expenditure on different assets or properties to
earn interest, dividend, income or other benefits. Purchase of securities, share,
debenture, bond, etc. are examples of investment. Investments are made for
resale purpose for benefit.

100 Office Practice and Accounting 10