Balance Sheet

Learning Objective: Prepare a balance sheet and interpret its components

If the Trading and Profit & Loss Account tells you how much a business earned, the Balance Sheet tells you what the business owns and owes on a particular date. It is like a financial snapshot. When Nepal Telecom or Himalayan Bank publishes its annual report, the balance sheet is one of the most closely examined documents by investors, regulators, and Nepal Rastra Bank.

What Is a Balance Sheet?

A balance sheet is a statement that shows the financial position of a business on a specific date. It lists all assets (what the business owns), liabilities (what the business owes), and owner's equity (the owner's stake).

Fundamental Rule: Assets = Liabilities + Owner's Equity

Classification of Assets

Fixed Assets (Non-current): Long-term assets used in the business for more than one year.

• Land and Building, Machinery, Furniture, Vehicles

Current Assets: Assets expected to be converted into cash within one year.

• Cash in hand, Cash at bank, Debtors (accounts receivable), Closing stock, Prepaid expenses

Classification of Liabilities

Long-term Liabilities (Non-current): Debts payable after more than one year.

• Bank loan, Mortgage, Debentures

Current Liabilities: Debts payable within one year.

• Creditors (accounts payable), Outstanding expenses, Short-term loans, Bank overdraft

Balance Sheet Format

Balance Sheet of Sagarmatha Traders as on 2081 Chaitra 31

| Liabilities | Rs. | Assets | Rs. | |---|---|---|---| | Capital | 3,00,000 | Land & Building | 2,50,000 | | Add: Net Profit | 1,80,000 | Machinery | 1,00,000 | | Less: Drawings | (60,000) | Furniture | 50,000 | | Bank Loan | 2,00,000 | Closing Stock | 1,50,000 | | Creditors | 80,000 | Debtors | 1,20,000 | | Outstanding Salary | 20,000 | Cash at Bank | 30,000 | | | | Cash in Hand | 20,000 | | Total | 7,20,000 | Total | 7,20,000 |

Working Capital

Working Capital = Current Assets - Current Liabilities

From the example above:

• Current Assets: Stock (1,50,000) + Debtors (1,20,000) + Bank (30,000) + Cash (20,000) = Rs. 3,20,000
• Current Liabilities: Creditors (80,000) + Outstanding Salary (20,000) = Rs. 1,00,000
• Working Capital = Rs. 3,20,000 - Rs. 1,00,000 = Rs. 2,20,000

A positive working capital means the business can comfortably meet its short-term obligations.

Key Term: Working Capital is the difference between current assets and current liabilities. It measures a business's ability to pay day-to-day expenses.

Summary

• The balance sheet shows financial position at a specific date, not over a period.
• Assets are classified as fixed (non-current) or current; liabilities as long-term or current.
• The balance sheet always balances: Assets = Liabilities + Capital.
• Working capital indicates a business's short-term financial health.