Question 16 of 26intermediate💡 UnderstandLong Answer6 marks

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

Correct Answer

Grouping means putting together items of a similar nature under a common heading. For example, the balances of cash, bank, and debtors can be grouped and shown under the heading of ‘Current Assets’, while fixed assets are grouped under ‘Non-current Assets’. This ensures the information provided is decision-useful for users.

Marshalling is the arrangement of assets and liabilities in a particular order within the balance sheet.

A balance sheet may be marshalled in the following two ways:

  1. In Order of Permanence: In this method, the most permanent asset or liability is put on the top of the balance sheet. Thereafter, the assets and liabilities are arranged in their reducing level of permanence. For instance, ‘Owners Funds’ and ‘Fixed Assets’ appear at the top.

  2. In Order of Liquidity: In this method, assets and liabilities are arranged based on how quickly they can be converted into cash or paid off. This is the alternative method used for presenting the financial position.

Exercise: Questions for Practice - Long Answers | Q: 4 | (Page 34)
For More Understanding

Explanation

The answer is derived from the section '8.6.3 Marshalling and Grouping of Assets and Liabilities'. The textbook explicitly defines Grouping as 'putting together items of similar nature under a common heading' (e.g., Current Assets) to make information decision-useful. It defines Marshalling as the 'arrangement of assets and liabilities in a particular order'. The context lists two specific ways to marshal a balance sheet: 'in the order of liquidity or in the order of permanence'. It further details that under 'permanence', the 'most permanent asset or liability is put on the top' followed by items in 'reducing level of permanence'.

Solution Steps

  1. Step 1: Define Grouping as aggregating similar items under a common head (e.g., Current Assets).

  2. Step 2: Define Marshalling as the arrangement of assets and liabilities in a specific order.

  3. Step 3: Identify the two ways of marshalling: Order of Permanence and Order of Liquidity.

  4. Step 4: Explain the Order of Permanence (most permanent items at the top, followed by reducing permanence).

  5. Step 5: Mention Order of Liquidity as the alternative arrangement method.

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