Let us Know Complete Process to Prepare Balance Sheet
Balance Sheet is a financial statement prepared by the business. It helps you and external shareholders in evaluating the financial performance of the business on a given date. Without being familiar with the components and format of the balance sheet, it won't be easy to prepare and read the balance sheet.
If you know balance sheet format, equations and components, it would be easy for you to prepare a balance sheet. If you want to read the balance sheet without any complication your fundamentals about balance sheet should be clear.
How to Prepare Balance Sheet?
Preparing balance sheets requires transactions accounted in the books of accounts. While Gen Balance Sheet Software (Free Download) is a popular software for Balance Sheet Preparation you need to prepare several other financial statements during the course which will help in providing you with the cumulative data at a place. To prepare a balance sheet let’s follow a step by step process which includes
- Ledger Account Preparation
- Trial Balance Creation
- Creation of Trading and Profit & Loss Account
- Eventually, Balance Sheet Preparation
Step-1: Prepare Ledger Accounts
First of all, you must prepare an account statement for each ledger with the use of transactions accounted in the Journal Book (a book used to keep a record of day to day transactions), it will help in evaluating the closing balance. The need for preparing an account statement is due to the possibility of several transactions in a ledger account. Also, you can get the current balance of each account from the Jornal Book.
Preparing a ledger account is nothing just mentioning all the debit and credit transactions into a statement about a ledger account. For instance, if you are preparing cash ledger account you will insert all the debit and credit into the statement and difference between the two along with the opening cash balance will be the closing balance for the ledger account.
Step-2: Creation of Trial Balance
A summary of all the ledger accounts called Trial Balance. It consists of all ledger accounts along with their closing balance. In the Trial balance, the formatting consists of the Debit column and Credit column which gets the closing balance of each ledger accounts.
According to the thumb rule, the total of debit balance should be equal to the total of credit balance in the Trial Balance. When it matches, it can be considered that the posting and ledger accounts are arithmetically correct. The creation of Trial balance is done to ensure that the recording and posting of ledger accounts are correct. The creation of Trial Balance is considered as the first statement in the process of balance sheet preparation and that’s why trail check is preferred to find that there is no difference between every Debit and Credit.
Step-3: Preparation of Profit and Loss Account
Profit and loss accounts are also a financial statement that helps in determining the profitability of a business. This financial statement composed of two sections including Trading account and profit & loss account. In most cases, businesses combine both into a single statement but a few businesses likewise manufacturing firm believes in preparing both the accounts separately.
Trading Account manifests outcome of buying and selling of goods comprising the direct costs accompanied with it. It gives the gross loss or gross profit excluding incurred expenses and incomes in operations. On the other end, profit & loss account reveals the net profit including the gross profit/loss and all the indirect expenses and income.
Trading and Profit & loss account composed of all the ledger accounts including purchase, sales, direct expense and income, indirect expenses and income. So it’s important to consider ledgers of the above-mentioned nature while preparing for Trading and profit & loss account.
Step-4: Balance Sheet Preparation
Post preparing all the above-mentioned statements, we head to prepare a balance sheet. Here, we considered all the ledgers which are non-revenue in nature or can say all the ledgers excluding those considered for Trading and Profit & loss account for the balance sheet.
In other words, we can say the balance sheet includes assets and liabilities. While preparing for the balance sheet we start with the assets side which initially incorporates fixed assets ledgers such as land and buildings, furniture, etc. and continue with the investment and all the current assets such as cash, Bank, Accounts receivables, Closing stock etc.
In the next step, we include all the ledger with liability nature under the liabilities side in case there are any liabilities such as depreciation, bad debts etc. Once mentioning all the details into the balance sheet, it needs to ensure that the assets side should be equal to the liabilities side of the balance sheet. If the equation of liabilities side is equal to the assets side, your balance sheet is mathematically correct.
4: Balance Sheet Preparation Based on Current Business Culture
In the early days, the balance sheet was prepared after the end of the financial year. However, in current business culture, when the balance sheet is considered as the topmost financial statement for making any sorts of decision about the business. It can be prepared quarterly/monthly or even monthly. Balance sheet preparation requires a lot of time and effort to consolidate the accounting data, so in order, to an easier balance sheet preparation, most businesses use accounting software which provides the aids of automatic creation of balance sheet along with several other financial statements.
Authorized Gen Balance sheet is one such tool to prepare balance sheet via Gen BAL Software as per the norms stated by the government of India.
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