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The rationale behind preparing financial statements is to present a summarised version of all financial activities in such a manner that all users can interpret and understand the information easily, appropriately and also take decisions accordingly.
Grouping of assets and liabilities: Grouping means showing similar assets and liabilities under a single head. For example, all assets that can be used for more than a year are clubbed together under the heading ‘fixed assets’, for example, building, furniture, machinery, etc.
Marshalling of asset and liabilities: When assets and liabilities are shown in a particular order of liquidity or permanence, they are said to be marshalled.
1. In order of liquidity: Liquidity means convertibility into cash. Assets that can be converted into cash in 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.
| Balance Sheet of.................., as on................ |
| | | | | | |
| Liabilities | Amount Rs | Assets | Amount Rs |
| Current Liabilities: | | Current Assets: | | |
| Bills Payable | | – | Cash in Hand | | – |
| Sunday Creditors | – | Cash at Bank | | – |
| Bank Overdraft | | – | Bills Receivable | | – |
| Long Term Loans | | – | Debtors | | – |
| Capital: | | | Closing Stock | | – |
| Opening balance | – | | Long Term Investments | |
| | Add: Net Profit | – | | Fixed Assets: | | |
| | Less: Drawings | – | – | Furniture | | – |
| | | | | Plant and Machinery | – |
| | | | | Land and Building | – |
| | | | | Goodwill | | – |
| | | | – | | | – |
| | | | | | | |
| | | | | | | |
2. In order of permanence: It is just the reverse of the above method. In this, assets and liabilities are arranged in their reducing level of permanence. The assets with higher degree of permanence are recorded first, followed by the assets with lower degree of permanence. For example, goodwill, land and building have the highest degree of permanence and hence are recorded at the top, whereas, cash at bank and cash in hand are recorded at the bottom. In the same way, liabilities are shown according to their life in the business. Liabilities with higher level of permanence like, capital is recorded at the top and other liabilities with lower permanence are recorded at the bottom.
| Balance Sheet of.................., as on................ |
| | | | | | | |
| Liabilities | | Amount Rs | Assets | | Amount Rs |
| Capital: | | | Fixed assets: | | |
| Opening Balance | – | | Goodwill | | – |
| | Add: Net profit | – | | Land and Building | | – |
| Less: Drawings | – | – | Plant and Machinery | | – |
| | | | Furniture | | – |
| Long Term Loans | | – | Long Term Investments | | |
| Current Liabilities: | | | Current Assets: | | |
| Bank Overdraft | | – | Closing Stock | | – |
| Sunday Creditors | | – | Debtors | | – |
| Bill Payable | | – | Bills Receivable | | – |
| | | Cash at Bank | | – |
| | | Cash in Hand | | – |
| | | | | | | |
| | | | | | | | |
| | | | – | | | | – |
| | | | | | | | |