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What is a Balance Sheet?

Last Update Date : April 30, 2019
Estimated Read Time: 5 min

balance sheet

One of the three fundamental financial statements is a Balance Sheet, also known as the statement of net worth or the statement of financial position. It shows a summary of the financial balances of an individual or organisation, whether it be a sole proprietorship, a partnership, a corporation, private limited company or any other organisation, at a specific point in time, such as the financial year-end. It can be defined as a statement of a firm’s assets, liabilities and net worth. The equities form as part of the liabilities.

Incorporated businesses are required to include balance sheets, income statements, and cash flow statements in financial reports to shareholders, submitting taxes, applying for loans or grants or seeking potential investors. The balance sheet proves to be the best place to find all information at one place.

The Equation of the Balance Sheet

Assets = Liabilities + Equity

This equation clearly states that how the assets were financed: whether by using owner’s money (equity) or by borrowing (liabilities). Balance sheet acquires its name due to the fact that it is presented with assets on one side and liabilities and equity on other with the two sections, always ‘balancing’.

Components of Balance Sheet

The balance sheet comprises of three major components – assets, liabilities and owner’s equity.

Assets

Assets can be defined as the resources of the company that has future economic value and are used to generate income for the business. These are divided into tangible and intangible assets. The tangible assets are further bifurcated into current, long-term and other assets. Few of the non-tangible assets are the trademark, copyrights, franchise agreements and goodwill.

Current assets include the cash, accounts receivable, inventory, prepaid expenses and all that can be converted into cash within a year.

Long Term assets include the following:

  • Fixed Assets includes all kinds of property, plant and equipment. These are generally capital intensive assets and are reported net of depreciation value in the balance sheet. All fixed assets are depreciable except for land.
  • Long-term investments include the securities which are held for more than a year and cannot be liquidated before that.

Liabilities

The debts owed by the business to outside parties are known as liabilities. These are the claims of outsiders against the entity, from bills it has to pay to suppliers to interest on bonds it has issued to creditors to rent, utilities and salaries. These are broadly divided into current liability and long-term liability.
Current liabilities are the obligations that are due within a period of one year. This includes interest payable, bank indebtedness, current portion of long-term debt, rent, tax and utilities, wages payable and others.

Long-term liabilities include the debts to be repaid by the entity in more than one year from the date of balance sheet. This includes long-term debt, deferred tax liability, bonds payable, pension fund liability, etc.

Shareholder’s Equity

Share Capital is the money invested by the business owners, meaning its shareholders, in the company. It is also known as net assets or net worth of the company since it is equivalent to assets of the company minus the liabilities. It can be shown as Net worth = Assets – Liabilities.

Retained Earnings are the net earnings of the company which it either reinvests in the business or uses to pay off debt. The rest of it is distributed to shareholders in the form of dividends. When a business is in the growth phase, retained earnings are generally used to fund expansion rather than paid out as dividends to shareholders.

Importance of Balance Sheet

  • It gives a business snapshot by providing an accurate picture of business status.
  • It provides information for apt decision making.
  • It proves to be helpful in calculating important financial ratios such as current ratio, debt-equity ratio, asset turnover ratio, return on equity and many more.
  • It shows the amount of capital retained in the business.
  • It helps in the analysis of the productivity, growth and solvency of the business.
  • It shows the pace at which the assets can be converted to capital.
  • It shows how much leverage the company has, which in turn indicates how much financial risk the company is taking. This can be done by comparing the debt to equity or debt to total assets.

How to Interpret the Balance Sheet?

The balance should be understood by all the shareholders or the potential investors of the company. This helps in understanding how healthy the company is. The ratios analysis derived from the balance sheet such as current ratio and debt to equity ratio can prove to be beneficial in this regard.

An important tip to understand the balance sheet of the company would be to compare the same with the previous periods. It should also be compared with the other businesses in the same industry since different industries have unique approaches to financing.

How is the Balance Sheet used in Financial Modeling?

The balance sheet is one of the important tools to analyse a company’s position. As stated above, it can be used to calculate a lot of financial ratios that will help to understand how the company is performing.

The cash flows can be calculated based on changes in the balance sheet. For example, a positive change in plant, property, and equipment is equal to capital expenditure minus depreciation expense. If depreciation expense is known, capital expenditure can be calculated and included as a cash outflow under cash flow from investing in the cash flow statement.

Balance Sheet Format and Example

The balance sheet of a company is prepared and presented in the form prescribed in Schedule III to the Companies Act, 2013. The format for the same is as follows:

Name of the Company: ABC India Pvt. Ltd.

Balance Sheet as on 31st March 2018

ParticularsNote No.Figures as at 31st March 2018

(Rs in lakhs)

Figures as at 31st March 2017

(Rs in lakhs)

I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital4848
(b) Reserves and surplus2,1562,100
(c) Money received against share
Warrants
(2) Share application money pending
Allotment
(3) Non-current liabilities
(a) Long-term borrowings100
(b) Deferred tax liabilities (Net)
(c) Other Long-term liabilities248236
(d) Long-term provisions1313
(4) Current liabilities
(a) Short-term borrowings1,4851,536
(b) Trade payables1,194987
(c) Other current liabilities1,5861,286
(d) Short-term provisions9087
TOTAL6,8206,393
II. ASSETS
Non-current assets
(1)        (a) Fixed assets
(i) Tangible assets689632
(ii) Intangible assets23
(iii) Capital work-in-progress4735
(iv) Intangible assets under
Development
(b) Non-current investments1515
(c) Deferred tax assets (net)
(d) Long-term loans and advances7077
(e) Other non-current assets209186
(2) Current assets
(a) Current investments
(b) Inventories2,9202,743
(c) Trade receivables1,3861,567
(d) Cash and cash equivalents266148
(e) Short-term loans and advances1,209983
(f) Other current assets74
TOTAL6,8206,393

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Niteesh Singh
Niteesh is a Tax Researcher and Content Lead at H&R Block (India). He holds an MBA with a specialisation in BFSI domain. In his career spanning over six years, he has helped thousands of people understand taxes in a simple and effective manner. Outside work, Niteesh is an astronomy geek who is also involved in wildlife conservation activities.

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