Balance Sheet Preparation and Classification for CMA Inter

Understand Balance Sheet Preparation and Classification

Key rules to remember

Accounting equation

Assets = Capital + Liabilities

Both sides of the balance sheet must total the same. A difference means an error or a missed adjustment.

Closing capital of a sole proprietor

Closing capital = Opening capital + Net profit + Additional capital − Drawings − Net loss

Items already taken through the Profit and Loss Account are in the profit figure, so do not count them twice. Adjust capital only for items not already taken through profit.

Net book value of a fixed asset

Book value = Cost − Accumulated depreciation

Show the asset at net value, or show cost and deduct depreciation, as the question requires.

Debtors (net)

Net debtors = Gross debtors − Bad debts − Provision for doubtful debts

Provision for discount on debtors, if given, is also deducted.

Current asset test

Current if expected to be realised, sold or consumed within the operating cycle or twelve months, or held for trading, or is cash or cash equivalent

Anything else is non-current.

Current liability test

Current if due to be settled within the operating cycle or twelve months, or held for trading

Instalments of a long-term loan due within twelve months are current.

Order of liquidity vs permanence

Liquidity: most liquid first. Permanence: most permanent first

The order for liabilities differs between the two formats. Under liquidity, short-term liabilities come first. Under permanence, capital comes first and short-term liabilities come last.

How to solve Balance Sheet Preparation and Classification questions

1. 1Read the format asked for: horizontal or vertical, liquidity or permanence order, sole proprietor, partnership or company.
2. 2Complete the final accounts first. Find net profit or net loss after all adjustments.
3. 3List every balance that is not an expense, income, purchase or sales item. These go to the balance sheet.
4. 4Adjust each item: add outstanding and prepaid items to the right place, deduct depreciation, bad debts and provisions, and add accrued income.
5. 5Compute closing capital: opening capital plus net profit, less drawings (and add fresh capital).
6. 6Classify each asset and liability as current or non-current, then arrange them in the required order.
7. 7Total both sides and check they agree. If not, recheck the profit figure, the double-sided effect of each adjustment and the capital.
8. 8Show workings, such as the capital account and net debtors, as notes. These earn step marks.

Quickest way: Tick-and-total method from the trial balance

Common mistakes in Balance Sheet Preparation and Classification

• Showing an item on both the final accounts and the balance sheet without the adjustment's second effect, such as outstanding rent charged to the P&L but not shown as a liability.

  Students treat each adjustment as a single entry rather than a two-sided one.

  Fix: Write both effects beside every adjustment before you start drawing the statement.

• Deducting drawings from profit rather than from capital, or forgetting drawings completely.

  Drawings sit in the trial balance and look like an expense.

  Fix: Drawings never enter the P&L. Deduct them in the capital working.

• Classifying a long-term loan instalment due within twelve months as non-current.

  Students classify by the name of the loan, not by when it is payable.

  Fix: Split the loan. The part due within twelve months is current; the rest is non-current.

• Mixing the order of liquidity and permanence, for example putting cash first and land second in a permanence-order sheet.

  Students memorise the lists without checking which order was asked.

  Fix: Write 'Permanence' or 'Liquidity' at the top of your rough work, then arrange items to match.

• Showing gross debtors and ignoring bad debts and provision.

  Adjustments are applied in the P&L but not carried to the balance sheet.

  Fix: Show debtors as gross less bad debts and provision, in a deduction line.

• Carrying the balance sheet total without checking it, leaving a difference to a suspense figure.

  Time pressure.

  Fix: If a small difference remains, recheck the profit and capital working. Do not invent a balancing figure unless the question says there is a suspense account.

Worked examples