The Balance Sheet reflects the financial position of an organization in terms of assets and liabilities on any particular date. It also enables us to assess the financial performance and soundness of the organization. In the case of NPOs, the procedure of preparing the Balance Sheet remains the same as that of the sole proprietor. That is why, we show all the assets on the right-hand side, while all the liabilities are on the left-hand side of the Balance Sheet. The following are the various steps to prepare a Balance Sheet.
Steps to Prepare Balance Sheet
Step 1: First of all, we show all the assets of an NPO on the right-hand side (or Assets side) of the Balance Sheet.
Step 2: Then, all the liabilities are shown on the left-hand side (or Liabilities side) of the Balance Sheet.
Step 3: Thereafter, all the capital payments from the Payments side of the R&P A/c are transferred to the Assets side.
Step 4: After this, all the capital receipts from the Receipts side of the R&P A/c are transferred to the Liabilities side.
Step 5: Next, we show the outstanding incomes and the prepaid expenses of the current year on the Assets side.
Step 6: In the same way, we show the outstanding expenses and the incomes received in advance on the Liabilities side.
Step 7: After this, the balancing figure of the I&E A/c is adjusted to the Capital Fund on the Liabilities side of the Balance Sheet.
- Surplus is added to the Capital Fund and,
- Deficit is deducted from the Capital Fund
Step 8: Finally, both sides are totaled. Ideally, both sides should match. The equality between the two sides ensures the arithmetical accuracy of the solution.
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Interest on Capital
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.
Interest on Drawings
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.
What is Operating Profit?
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.
Balance Sheet
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
Profit and Loss Account
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.
What are Adjusting Entries?
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.