Basics of a Balance Sheet

Balance Sheet of a Company:

 A balance sheet gives the picture of assets and liabilities of the company as on the last minute of 31st March YYYY. So, many times the balance sheet of a company appears better than what it is in real. Sometimes, companies will request all debtors to clear the outstandings just to make a pretty picture by 31st of March. Every balance sheet must contain the previous year’s details too.

 Let us first understand the various components in a Balance Sheet of a company.

 a). Liabilities or Sources of Funds                   b). Assets or Application of Funds

 Liabilities(H) or Sources of Funds(V)

 The Profit at the bottom of the P&L Statement may be put into several Reserves, and will be shown in the Balance Sheet. Let us look into it.

1. Share Capital (Not at the Market Price but the historical price at which it is sold.)

2. Reserves and Surplus: It includes the following – The Reserves of the before year, if present. – The PAT component from the P&L Statement. NOTE: The Reserves and Share Capital come under liabilities because you are liable to pay to the shareholder.

3. Secured and Unsecured Loans

4. Current Liabilities (Dividend to be paid to the shareholders etc…)

Add all the above to form one leg of the Balance Sheet.

Assets(H) or Application of Funds(V)

1. Fixed Assets or Gross Block(historical cost only)

2. Depreciation: The fixed assets may depreciate in value, which is put here. But, the depreciation in Balance Sheet is accumulated every year for the machine, whereas in P&L it is only for that year. Suppose you bought a machine for Rs 5000/- and the depreciation is 10%. Then, in the first year it will show 500 in both P&L and the Balance Sheet, but in the second year P&L will show 500 and the Balance Sheet will show 1000.

 NOTE: If Depreciation amount is less, it indicates that the company is fairly young and the due date for replacements is far. If the Depreciation amount is more in the Balance Sheet, it indicates that the company is decently old and the day for replacement is near.

 Less: Depreciation (The depreciation should be minused from the Fixed Assets.)

 3. Investments: Investments made by the company in other companys’ shares and others. Generally, companies invest in their suppliers companies to have a say in their company. Similarly, companies invest in the subsidiary companies.

4. Current Assets: This is opposite to Fixed Assets. Current Assets are those which will become cash in the near time. For example, semi-finished goods, Bank Balance is a good example of Current Assets. Sometimes, you give advances to your suppliers and these advances also come under Current Assets. Loans which generally include the loans given to the employees come under Current Assets.

Add all the above to form the other leg of the Balance Sheet.

The two legs of a Balance Sheet should be the same, and that is why it is called Balance Sheet because it always balances.