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.
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’.
The balance sheet comprises of three major components – assets, liabilities and owner’s equity.
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:
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.
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.
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.
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.
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
|Particulars||Note 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 capital||48||48|
|(b) Reserves and surplus||2,156||2,100|
|(c) Money received against share||–||–|
|(2) Share application money pending|
|(3) Non-current liabilities|
|(a) Long-term borrowings||–||100|
|(b) Deferred tax liabilities (Net)||–||–|
|(c) Other Long-term liabilities||248||236|
|(d) Long-term provisions||13||13|
|(4) Current liabilities|
|(a) Short-term borrowings||1,485||1,536|
|(b) Trade payables||1,194||987|
|(c) Other current liabilities||1,586||1,286|
|(d) Short-term provisions||90||87|
|(1) (a) Fixed assets|
|(i) Tangible assets||689||632|
|(ii) Intangible assets||2||3|
|(iii) Capital work-in-progress||47||35|
|(iv) Intangible assets under||–||–|
|(b) Non-current investments||15||15|
|(c) Deferred tax assets (net)||–||–|
|(d) Long-term loans and advances||70||77|
|(e) Other non-current assets||209||186|
|(2) Current assets|
|(a) Current investments||–||–|
|(c) Trade receivables||1,386||1,567|
|(d) Cash and cash equivalents||266||148|
|(e) Short-term loans and advances||1,209||983|
|(f) Other current assets||7||4|
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