Preparation of Balance Sheet by Grouping and Marshaling of Assets and Liabilities

Read this article to learn about the preparation of balance sheet by grouping and marshaling of assets and liabilities.

The balances of real accounts and personal accounts are to be shown in the balance sheet in such a manner that the balance sheet should depict a bird’s eye view of the overall financial position of the business concern. In this regard, balance sheet is prepared by grouping and marshaling various assets and liabilities of the business enterprise.

(i) Grouping of Assets and Liabilities:

Grouping of assets and liabilities means putting various assets and liabilities having same nature under some common headings. For example, instead of showing the names of all customers, the consolidated amount is to be shown under the head ‘Sundry Debtors’.

Similarly, instead of showing the names of all persons to whom amount is owed on account of goods purchased or services rendered, the consolidated amount is to be shown under the head ‘Sundry Creditors’.

(ii) Marshaling of Assets and Liabilities:

All assets and liabilities of a business enterprise can be shown either in an order of

(a) Liquidity or

(b) Permanence.

The arrangement of various assets and liabilities in either of this way is called Marshaling of Assets and Liabilities.

(a) Order of Liquidity or According to Time:

In case of order of liquidity, an enterprise first shows the asset which is more readily convertible into cash followed by the asset which cannot be so easily converted into cash as compared to the previous one. In the same manner, the liabilities which can be paid immediately are shown first and the liabilities which are to be paid later are mentioned after that. In short, the principles which are followed to arrange the items are from liquidity to rigidity.

(b) Order of Permanence or According to Purpose:

In case of order of permanence, an enterprise first records those items of assets which are more permanent and thereafter less permanent items on the assets side of the balance sheet. In the same manner, long term liabilities are mentioned first, thereafter medium term liabilities and after that short term liabilities are to be recorded on the liabilities side of the balance sheet.

It can be said that the rule followed for putting all items of assets and liabilities in the balance sheet is based on the purpose for which those assets were held and liabilities were undertaken. In other words, we can say assets and liabilities are shown in the balance sheet on the basis just opposite the basis of order of liquidity.

While preparing balance sheet, items are to be shown in the following order:

There are two formats in which balance sheet is usually prepared viz.,

(i) Horizontal format and

(ii) Vertical format.

Either of these two can be used to arrange the assets and liabilities in the balance sheet: