The main purpose of Balance Sheet is to show the financial position of the business. Therefore, assets and liabilities in Balance Sheet should be shown in such an order which help to understand the financial position easily. To serve this purpose assets and liabilities are recorded in Balance Sheet in a certain order. This order of assets and liabilities in Balance Sheet is called Marshalling.
Methods of Marshalling
1. The Order of Permanence
Under this method, the assets are shown according to their permanency i.e. permanent assets are shown first and less permanent assets are shown afterward. Similarly, the fixed or the long term liabilities are shown first and the current liabilities afterward. The following is the specimen of the balance sheet under this order.
2. Order of Liquidity
Under this method, the current and fixed assets of the business are entered in the balance sheet in the order of the degree of ease with which they can be converted into cash and the liabilities in the order of urgency of payment. The order of liquidity is generally used by the sole traders and partnership firms. The following is the format of balance sheet under Order of Liquidity Method.
3. Mixed Order
Under this order of arrangement, the assets are arranged in the order of liquidity and the liabilities are arranged in the order of permanency. The format of Balance sheet prepared under this method is as below: