What is a balance sheet?
A balance sheet is a financial statement that summarises a company’s equity, liabilities, and assets at a specific point in time. These three parts of the balance sheet show what the company owns and what it owes.
A balance sheet of a company is prepared in the prescribed format: Schedule III part 1 of the companies act, 2013.
What is the Purpose of the balance sheet?
A balance sheet is a snapshot statement of the financial position of a company at the end of the accounting. It lists assets, equity, and liabilities. Non- financial companies categorize assets and liabilities into current and non-current categories. Finance companies present assets and liabilities in order of liquidity.
To avoid the cluttering of information, assets, and liabilities are grouped under different categories and presented on the face of the balance sheet. The breakup of each item on the balance sheet and explanation related to those items are provided in notes to accounts.
Users of financial statement analysis information in the balance sheet to assess the financial health of the company. This information when analyzed with the information provided in the statement of profit and loss helps in developing a perspective on the ability of the company to utilize the infrastructure productively and to manage working capital efficiently, which is necessary for forecasting future cash flow.
What is the Format of the balance sheet?
According to the prescribed format Schedule III, part 1 of the companies act, 2013 is divided into two segments, Equity &libility, and assets. Equity & liability are presented in the upper segment and assets are presented in the lower segment. The format of the balance sheet is shown below:-
What are the contents of the balance sheet?
Equity & liabilities
Equity:- Equity is the liability toward shareholders and is termed as shareholders fund. It includes share capital, reserve & surplus, and money received against share warrants.
Shareholders funds:- Shareholders fund comprises of three items share capital, reserve & surplus, and money received against share warrants.
Share capital:- Share capital denotes the amount of capital raised by the issue of shares, by a company. It is collected through the issue of shares and remains with the company until its liquidation. Share capital is owned capital of the company since it is the money of the shareholder and the shareholder are the owners of the company. The total share capital is divided into small parts and each part is called a share. Share is the smallest part of the total capital of a company.
Reserve & surplus:- Reserves and Surplus are all the cumulative amount of retained earnings recorded as a part of the Shareholders Equity and are earmarked by the company for specific purposes like buying of fixed assets, payment for legal settlements, debts repayments, or payment of dividends, etc.
Money received against share warrants:- Share warrants are ft6bn equity share at a specified date and a specified rate.
Application money pending allotment:- Amount received by the company towards share application and against which it will certainly allot shares is shown against share application money pending allotment.
Liabilities:- A liability is something a company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services. Liabilities include current and non-current liabilities.
Non- current liabilities:- non-current liabilities are those liabilities that are not current liabilities or which can not be cleared shortly. Non-current liabilities are classified into 4 categories:- long term borrowing, deferred tax liabilities, other long term liabilities, long term provisions.
Long term borrowing:- long term borrowings are the borrowing/loans which are repayable by the company after 12months from the date of the balance sheet or after the period of operating cycle debenture, bonds, term loans, public deposit, and other loans & advances are some example of long term borrowing.
Deferred tax liabilities:- In the case where accounting income is more than the taxable income, it results in deferred tax liabilities. The number of deferred tax liabilities is adjusted to the existing balance in deferred tax liabilities.
Other long term liabilities:- Long term liabilities other than long-term borrowing are shown as other long term liabilities, these are classified into trade payables and others.
Long term provisions:- Long- term provisions are the provisions against which liability will arise after 12 months of the date of the balance sheet or after the period of operating cycle provisions for gratuity, provisions for earned leave, and warranty provision are some example of long term provisions.
Current liabilities:- If liability is expected to be settled in the company’s normal operating cycle or due to be settled within 12 months after the reporting date of liability or held primarily to be traded or if there is no unconditional right to defer the settlement for at least 12 month after the reporting date it is called as current liabilities.
Short term borrowing:- A short term borrowing is a type of loan that is obtained to support a temporary personal or business capital need. As it is a type of credit it involves a borrowed capital amount and interest that needs to be paid by a given due date which is usually within a year from getting the loan.
Trade payable:- Trade payable is the amount payable against the purchase of goods or services that are taken in the normal course of business. It includes both the sundry creditors & bills payable.
Other current liabilities:- All current liabilities that do not come under short term borrowings or trade payables are classified as shown as other current liabilities. It includes, current maturity of long term debts, interest accrued and due on borrowing, income received in advance, unpaid dividends, outstanding expenses, other payables.
Short term provisions:- short term provisions are the provisions for liabilities that are likely to be paid within 12 months of the date of the balance sheet or within the period of the operating cycle. Short term provisions are classified into, provision for employees benefit, provision for tax, and other provisions.
Assets
Assets:- An asset is a resource with economic value that an individual, corporation owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet and are bought or created to increase a firm’s value. An asset can be thought of as something that in the future can generate cash flow, reduce expenses, or improve sales.
Non-current assets:- Non-current assets are those assets that are not current assets. Non-current assets are a company’s long term investments for which the full value will not realize within the accounting year, these are classified into five heads.
Fixed assets:- Fixed assets are those assets that are held by a company, not for sale but for the purpose to increase the earning of the business. Fixed assets are classified into, tangible assets, intangible assets, capital work-in-progress.
Non- current investments:- Non-current investment are investments which are held not with the purpose to resell but to retain them. Non-current investments are further classified into trade investments and other investments.
Deferred tax asset:- Each year accounting income is compared with taxable income and if the difference between the two exists which is temporary in nature is termed as deferred tax, in case accounting income is less than the taxable income, it results in deferred tax assets
Long term loans & advances:- Long term loans and advances are those loans and advances that are expected to receive back in cash or kind, in the form of an asset after 12 months from the date of the balance sheet or after the period of operating cycle these are classified into, capital advances, security deposits, other loans & advances.
Other non-current assets:- All other non-current assets that do not fall into any of the above classifications are classified or shown as other non-current assets, they reclassified into long term trade receivable, other.
Current asset:- Current asset represents all the assets of a company that is expected to be sold, consumed, used, or exhausted before the operating cycle or before the date of the balance sheet. Current assets are categorized into six heads.
Current investment:- Current investment are those investments which are held to be converted into cash within a short time, within 12 months from the date of purchase of an investment, these are classified into investment in equity instruments, investment in preference share, investment in government securities, investment in debentures bonds, investment in mutual funds, investment in partnership firms and other investment.
Inventories:- Stock held for trade in the ordinary course of business, i.e. for manufacturing or trading of goods are classified or shown as current assets because they are held with the purpose to convert them into cash and cash equivalent within a short period it includes, raw material, work-in-progress, finished goods, stock-in-trade, stores & spares, loose tools.
Trade receivable:- Trade receivable means the amount receivable for the sale of goods or services rendered by the company in the normal course of business. They are shown as a current asset if they are receivable within a period of 12 months from the date of sale or within the period of the operating cycle. Trade receivable includes both debtors & bills receivables.
Cash & cash equivalent:- Cash and cash equivalent refers to the line items on the balance sheet that reports the value of a company’s assets that are cash or can be converted into cash immediately, balance with banks, cash in hand, cheques on hand, etc.
Short-term loans and advances:- Short term loans & advances are those loans & advances which are expected to be realized within 12 months from the date of the balance sheet or within the period of the operating cycle.
Other current assets:- All other current assets that don't fall in any of the above classification or categories under current asset are classified or shown as other current assets example: unamortized exp, Prepaid exp, dividend receivable and advance taxes.
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