Question

What is meant by grouping and marshaling assets and liabilities?

Answer 1

1. The assets and liabilities shown in the balance sheet are grouped and presented in a particular order.
2. The term ‘grouping’ means showing the items of similar nature under a common heading.
3. For example, the amount due from various customers will be shown under the head ‘Sundry debtors/ Similarly, under the head ‘Current assets’, the balance of cash, bank, debtors, stock, and other current assets will be shown.
4. ‘Marshalling’ is the arrangement of various assets and liabilities in proper order.
5. Marshaling can be made in one of the following two ways:

• In the order of liquidity:

1. According to this method, an asset which is most easily convertible into cash, i.e., cash in hand is shown first and then will follow those assets which are comparatively less easily convertible, So that the least liquid asset i.e., goodwill is shown last.
2. In the same way, the liabilities which are to be paid at the earliest will be shown first. In other words, current liabilities are shown first, then fixed or long-term liabilities, and finally the proprietor’s capital.

• In the order of permanence:

1. This method is exactly the reverse of the first method.
2. An asset which is more permanent, i.e., goodwill is shown first followed by assets which are less permanent. Similarly, those liabilities which are to be paid last will be shown first.
3. In other words, the proprietor’s capital is shown first, then fixed or long-term liabilities, and lastly the current liabilities. Joint-stock companies are required under the Companies Act to prepare their balance sheet in the order of permanence.