Reading this term, you might be thinking that one more financial statement is to be prepared. But you will be relieved to know that it is not at all difficult to prepare the Opening Balance Sheet. All the assets are recorded on the Assets side and all the liabilities are recorded on the Liabilities side of the Balance Sheet.
Steps to Prepare Opening Balance Sheet
The given below are the steps that are followed to prepare the Opening Balance Sheet.
Step 1: First of all, the value of all the assets at the beginning of the year is recorded on the Assets side of the Opening Balance Sheet.
Step 2: Then, the value of all the liabilities at the beginning of the year is recorded on the Liabilities side of the Opening Balance Sheet.
Step 3: Next, we show the outstanding incomes and prepaid expenses at the beginning of the year on the Assets side.
Step 4: In the same way, we show the outstanding incomes and the incomes received in advance on the Liabilities side.
Step 5: Finally, both sides are totaled. The difference between the total of the assets side and the total of liabilities side represents the amount of Capital Fund at the beginning of the year.
Any interest paid on capital is considered as an expense and is shown in the Profit and Loss Account. Treatment of interest on capital in the final accounts is as follows.
Treatment of interest on drawings in the final accounts is as follows. Firstly, interest in drawings is shown on the credit side of the Profit and Loss Account.
Operating Profit can be defined as the profit earned by carrying the normal business activities. It is computed by subtracting the operating expenses from the gross profit.
The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.