We know that a Balance Sheet is one of the important financial statements that represent the financial position of a business concern at a particular date. Therefore, it becomes necessary to show and group the various assets and liabilities in a Balance Sheet under particular heads. The arrangement of assets and liabilities under particular heads and their presentation in the Balance Sheet in a particular order is referred to as Grouping and Marshalling of Assets and Liabilities.
Grouping and Marshalling of Assets and Liabilities
Grouping of Assets and Liabilities
Grouping implies showing various assets and liabilities of similar nature under one single head. For example, all assets that can be used for more than a year are clubbed together under the head ‘Fixed Assets’. For example, Building, Furniture, Machinery, etc.
Similarly, all the liabilities that are to be repaid within a period of one year are clubbed together under the heading of ‘Current Liabilities’. For example, Creditors, Bills Payable, Bank Overdraft, etc. The given below diagram shows the grouping of assets and liabilities of similar nature under a common head.
Marshalling of Assets and Liabilities
Marshalling implies showing various assets and liabilities in a particular order. In short, when assets and liabilities are shown in a particular order of liquidity or permanence, they are said to be marshalled. Generally, assets and liabilities are shown either in order of liquidity or in order of permanence.
In Order of Liquidity: Liquidity means convertibility into cash. Assets that can be converted into cash in the least possible time, i.e., more liquid assets are recorded first, followed by the lesser liquid assets. In a balance sheet, cash in hand is recorded at first and goodwill at last. In the same way, liabilities that are to be paid first, i.e., high priority liabilities are recorded first, followed by the lower priority ones. In a balance sheet, current liabilities are recorded first and then the long-term liabilities and capital at the last.
In Order of Permanence: It is just the reverse of the above method. As per this, assets and liabilities are arranged in their reducing level of permanence. The assets with a higher degree of permanence are recorded first, followed by the assets with a lower degree of permanence.
For example, goodwill, land, and building have the highest degree of permanence and hence they are recorded first on the Assets side of the Balance Sheet. On the other hand, assets that have a low degree of permanence such as cash at the bank and cash in hand are recorded in the last. In the same way, liabilities are also shown according to their repayment period in the business. Liabilities that are to be repaid after a long period or that are to be paid at last are recorded first on the Liabilities side of the Balance Sheet. For example, Capital is recorded first in the Balance Sheet followed by other liabilities on the basis of their repayment period.
Trading Account is an account that is prepared to ascertain the trading results of a firm in form of gross profit earned or gross loss incurred during an accounting period.
Users of Financial Statements
The users of financial statements can be broadly classified as Internal Users and External Users. Internal Users are the users who have direct access to the financial statements
Financial statements reveal the profitability and financial position of a business at the end of the accounting year. It provides financial information to various accounting users that
What is a Promissory Note?
A promissory note is an unconditional promise in writing given by the buyer (or creditor) to the seller (or debtor) to pay the amount of money specified therein to the seller or to the order of seller or to bearer.