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Explanation of Balance Sheet as a Financial Statement

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The Balance Sheet is not an account. It is merely a statement of ledger balances. It defers from the Income and Expenditure Account. In this respect, when the Various Nominal Account were closed, corresponding entries were made in the Income and Expenditure Account. When the Real and Personal Accounts were closed the corresponding entries were made by carrying down the balances of each account immediately below the totals of the account. The Balance Sheet is simply a Statement of the balances remaining in the books after the Income and Expenditure Account has been closed.

The debit balances or Assets are put on the right hand side of the Balance Sheet and the credit balances. i.e, Capitals, liabilities, and Surplus, are put on the left-hand side. It should be very carefully observed, then, that the items in the Balance sheet are placed on the opposite sides to that on which they would have been placed if the balance Sheet had been an account and the items had been corresponding entries arising out of the closing of the ledger account.

A format of the Balance Sheet of a Sole Trader

Balance Sheet of …….as at 31st December……….

explanation-of-balance-sheet-as.

From the above Balance Sheet, there are a number of points relating to style that deserve your careful attention:

  1. It should be observed that the Balance Sheet gives the financial position at a given date, i.e. the last day of the accounting period, whereas an Income and Expenditure Account gives the income and expenditure for a period of time, i.e. the whole of the accounting period. 
  2. It is customary to lead the left hand side “liabilities” and the right-hand side “Assets”, although strictly speaking all the items on the left-hand side are not liabilities. 
  3. The omission of “Dr.” and “To” on the left-hand side, and “Cr” and “By” on the right-hand side should be observed. These are omitted because the Balance Sheet is not an account. 
  4. The use of the words “Debtors” and “Creditors” should be noted. These terms are used rather than the names of the individual debtors and creditors, because in practice there would be too many for them to be specified individually in the Balance Sheet. The Balance Sheet must be a concise statement of ledger balances, therefore balances of the same nature are given in one total.  Like the Trial Balance, the two sides of the Balance Sheet must be equal. 

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