- Summary of past income and expenditure – to ascertain whether they have been profitable during a given period.
- The availability of resources to earn income and incur expenditure in the future – to ascertain whether they can at least maintain the same level of profitability or not.
- Capital: This represents the owner’s investment in the business and all the money that is due to the owner (for e.g., profits). The business is treated as separate entity from the owner and whatever money the owner invests in the business will have to be ultimately paid back to him. The Capital Account is also shown under the liability side of the balance sheet for the same reason.
- Liability: This represents all the financial items that are in the nature of an obligation to an external entity. Liabilities would include loans and deposits taken, expenses payable in the future, trade creditors, bank overdraft, etc.
- Asset: This represents all the financial items that are in the nature of a benefit or a resource that is receivable in the future or is used to reap future economic benefits. Assets would include Tangible fixed assets (Plant & machinery, building, land, furniture, etc.), Intangible assets (Patents, trademarks, goodwill, etc.), trading stock that remains unsold at the end of the period, Loans given to other parties, Deposits given, Cash and bank balances, etc.
- The transaction of a sole proprietor starting a business by opening a new bank account and investing Rs. 10,000 would result in the bank balance appearing in the Asset side of a balance sheet to increase by Rs. 10,000 and the Capital account appearing in the Liability side would also increase by Rs. 10,000.
- Where goods are purchased for Rs. 5,000, this amount would show up in the Purchase account as a part of the profit and loss account (as a loss/debit) and the bank balance reduces by Rs. 5,000.
- Where goods are sold for Rs. 6,000, this amount would show up in the Sales account as a part of the profit or loss account (as a profit/credit) and the bank balance increase by Rs. 6,000.
- The above 3 transactions would have the following result in the Balance Sheet:
- The Capital account would be showing a balance of Rs. 10,000 in the liability side.
- The profit and loss account would be depicting a net profit of Rs. 1,000 in the liability side. This would bring the total of the liability side to 10,000 + 1,000 = 11,000.
- The bank account would have a total balance of Rs. 11,000 and hence the asset side of the balance sheet would also be Rs. 11,000
|Liabilities||Amt (in Rs.)||Assets||Amt (in Rs.)|
|Profit and loss account||1,000|