Question 6 of 26intermediate🔧 ApplyShort Answer3 marks

Arrange the following items in the order of both permanence and liquidity. Also group them under logical heads: Liabilities: Long-term loans, Bank overdraft, Bills payable, Owner’s equity, Short-term loans, Sundry creditors. Assets: Building, Cash in hand, Cash at bank, Bills receivable, Sundry debtors, Land, Finished goods, Work in progress, Raw material.

Correct Answer

Order of Permanence (with Logical Heads)

Liabilities:

  1. Owner's Funds: Owner's equity
  2. Non-Current Liabilities: Long-term loans
  3. Current Liabilities: Short-term loans, Bank overdraft, Bills payable, Sundry creditors

Assets:

  1. Non-Current Assets (Fixed Assets): Land, Building
  2. Current Assets: Finished goods, Work in progress, Raw material, Bills receivable, Sundry debtors, Cash at bank, Cash in hand

Order of Liquidity (with Logical Heads)

Liabilities:

  1. Current Liabilities: Bank overdraft, Bills payable, Sundry creditors, Short-term loans
  2. Non-Current Liabilities: Long-term loans
  3. Owner's Funds: Owner's equity

Assets:

  1. Current Assets: Cash in hand, Cash at bank, Bills receivable, Sundry debtors, Finished goods, Work in progress, Raw material
  2. Non-Current Assets: Building, Land
Exercise: Do it Yourself | Q: 1 | (Page 28)
For More Understanding

Explanation

This question tests the concept of Marshalling and Grouping of assets and liabilities in a Balance Sheet. In order of permanence, the most permanent item appears first - Owner's equity is most permanent among liabilities, and Fixed Assets (Land, Building) are most permanent among assets. In order of liquidity, the sequence reverses - most liquid items (Cash, Bank overdraft) appear first. Grouping means putting similar items under common heads like Current Assets, Non-Current Assets, Current Liabilities, etc.

Solution Steps

  1. Step 1: Identify logical groups - Owner's Funds, Non-Current Liabilities, Current Liabilities for liabilities side; Non-Current Assets and Current Assets for assets side.

  2. Step 2: For permanence order - arrange from most permanent to least permanent (Owner's equity → Long-term loans → Current liabilities for liabilities; Land/Building → Stock → Debtors → Bank → Cash for assets).

  3. Step 3: For liquidity order - reverse the sequence (most liquid first: Cash → Bank → Debtors for assets; Current liabilities → Long-term loans → Owner's equity for liabilities).

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