Marshalling of assets and liabilities refers to the process of arranging the items of a balance sheet (assets and liabilities) in a specific order. In other words, it is a process of arranging the various assets and liabilities appearing in a balance sheet as per a specific order.
There are two methods by which assets and liabilities can be marshalled and these are:
1. In order of liquidity
2. In order of permanence
In order of liquidity: Liquidity refers to the quality of an asset by which it can easily get converted to cash. We can say that an asset is highly liquid if that asset can be converted into cash fast.
Therefore, if we marshall the assets and liabilities of a balance sheet in the order of liquidity, the assets and liabilities are placed in a specific order, based on their decreasing liquidity.
Asset that is most liquid is placed first in the asset column and the asset which is having the least liquidity is placed last.
As per this method, cash will be placed at the top of the list as it is the most liquid asset while goodwill will be placed at the bottom, as it is the least liquid asset and can only be realised when the company is dissolved.
In the case of liabilities, cash is needed to pay off the liabilities, short term liabilities require that they should be cleared first. Hence assets that can be easily converted to cash will be used for clearing the short term liabilities.
Therefore, as per this method, the liabilities that are required to be paid off at the earliest are placed first matching with the highly liquid assets. Similarly, liabilities that are paid out at the last are placed with the asset that is having the least liquidity.
As per this rule, the bank overdraft is an example of a liability that is paid off at the earliest while capital is the liability that is paid out at the last, only if the organisation is dissolved.
Order of Permanence: Order of permanence is based on the theory of permanence. In other words, permanence means the tendency of the asset for staying within the organisation or the extent of life of the asset within the organisation.
An asset is said to be having a higher degree of permanence when an asset is staying longer with the organisation.
Therefore, in this method assets and liabilities are placed in order of their decreasing permanence.
Asset to be placed first is the one having the highest permanence, while the asset that has the least permanence is the one to be placed last. As per this rule, goodwill is regarded as the asset that will have the highest permanence as it is the last asset that leaves the organisation, while cash is regarded as the asset with the least permanence as it is the fastest to leave the organisation.
Similarly, the liability that has the highest permanence is placed first while the liability having the least permanence is placed last in order. As per this rule, capital is regarded as the liability having the highest permanence while bank overdraft is regarded as the liability with the least permanence.
This was all about the topic of Marshalling of Assets and Liabilities, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S.