Question

What is meant by Grouping and Marshalling of assets and liabilities? Explain the ways in which a balance sheet may be marshalled.

Answer 1

Grouping:
In a balance sheet, assets and liabilities should be properly grouped and classified under appropriate headings. The individual balance of each debitors and creditors account need not be shown. Debtors and creditors should be shown in total. The grouping together of dissimilar assets will make the balance sheet misleading. Hence, it can be said that grouping means putting together the items of similar nature under a common heading.
Marshalling:
The term marshalling means the order in which assets and liabilities are stated on the balance sheet as the balance sheet exhibits the financial position of a concern even to a non-technical observer. It is of great importance that the different assets and liabilities should be arranged in the balance sheet on certain principles.
The balance sheet is generally marshalled in three ways.
(i) The order of liquidity or realisability- According to this method, assets are entered up in the balance sheet following the order in which they can be converted into cash and the liabilities in the order in which they can be paid off. The following is a format of a balance sheet based on this order.
$\text{Balance Sheet}$
$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt.~(Rs.)}& \text{Assets}& \text{Amt.(Rs.)}\\ \text{Bills Payable}& & \text{Cash in Hand}& \\ \text{Loans}& & \text{Cash at Bank}& \\ \text{Trade Creditors}& & \text{Investments}& \\ \text{Capital}& & \text{Bills Receivable}& \\ & & \text{Debtors}& \\ & & \text{Stock (Closing)}& \\ & & \text{Stores}& \\ & & \text{Furniture and Fixtures}& \\ & & \text{Plant and Machinery}& \\ & & \text{Land and Buildings}& \end{array}$

(ii) The order of performance- This method is the reverse of the first method. under this method, the assets are stated according to their permanency, i.e., permanent assets are shown first and less permanent are shown one after another. Similarly, the fixed liabilities are stated first and the floating liabilities follow. The following is a specimen of a balance sheet based on this order.
$\text{Balance Sheet}$
$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt. (Rs.)}& \text{Assets}& \text{Amt.(Rs.)}\\ \text{Capital}& & \text{Land and Buildings}& \\ \text{Trade Creditors}& & \text{Plant and Machinery}& \\ \text{Loans}& & \text{Furniture and Fixtures}& \\ \text{Bills Payable}& & \text{Stores}& \\ & & \text{Stock (Closing)}& \\ & & \text{Debtors}& \\ & & \text{Bills Receivable}& \\ & & \text{Investments}& \\ & & \text{Cash at Bank}& \\ & & \text{Cash in Hand}& \end{array}$

(iii) Mixed Order of Arrangement- This method is the combination of the first two methods. Under this method, the assets are arranged in order realisability and liabilities are arranged in order of performance.
The first method is adopted by sole proprietors, firms and partnership concerns. The second method is adopted by companies and the third method is adopted by banking concerns.
$\text{Balance Sheet}$
$\begin{array}{cccc}\text{Capital and Liabilities}& \text{Amt.(Rs.)}& \text{Assets}& \text{Amt.(Rs.)}\\ \text{Capital}& & \text{Cash in Hand}& \\ \text{Trade Creditors}& & \text{Cash at Bank}& \\ \text{Loans}& & \text{Investments}& \\ \text{Bills Payable}& & \text{Bills Receivable}& \\ & & \text{Debtors}& \\ & & \text{Stock (closing)}& \\ & & \text{Stores}& \\ & & \text{Furniture and Fixtures}& \\ & & \text{Plant and Machinery}& \\ & & \text{Land and Buildings}& \end{array}$