How to read balance sheet of a company?

What is the Balance Sheet?

Balance sheet is the financial statements which includes assets, liabilities, shareholders equity at a specific point of time. It's a snapshot what a company owns and owes and shareholders invested fund.             

So, the formula is: Assets = Liabilities + Shareholders Equity

  

               

Understanding & Reading the balance sheet of a company 

Balance sheet consists of three components: shareholders fund, assets & liabilities. 

      

Let's understand the each aspect of the statement of balance  sheet of a company.

                         

Assets

An assets is any resource, owned by entity which is capable of generating future cash flows. 

In the balance sheet of a company, the assets are classified with respect to their period of holding that is non current assets and current assets.

Non Current Assets

Long term assets, that a firm owns and uses in its operations to generation income. These assets are not expected to be converted into cash within a year. It includes,

(a) Property, plant and equipment

The physical assets which are expected to deliver long term benefits are covered under this head. Assets such as office, building, and stuff quarters are charged different depreciation rate and are recorded separately in different blocks according to the rate of depreciation applicable on them.

(b) Capital Working In progress

If an assets is not ready to be utilized before the date of balance sheet preparation, all expenses on account of such construction are recorded under the head "capital working in progress".

(c) Investment Property

The amount of money invested in real estate that has been purchased with the intention of earning a return on investment either through rental income or capital appreciation is written the under this section. This does not include any property which is in uses manufacturing, administrative purposes.

(d) Other Intangible Assets

These assets which are not physical in nature like patent, trademark and copyright etc. are recorded under this head.

(e) Financial Assets

 

(i) Investment

The investment done for long term purpose are written in under this section. Like investment in stocks, bonds and fixed deposits etc.

(ii) Loans

It includes long term loan given to different entity.

(iii) Other Financial Assets

Other non-physical financial assets not included in the above category like commodities, derivatives and other investments avenue are written here.

(f) Tax Assets

When profits in books of the account are more than profit calculated as per income tax provision the actual tax liabilities also decreases. These different amount in tax liability is considered as tax assets.

(g) Other non current assets

It includes other long term assets which do not fall into the category of fixed assets, investment, intangible assets etc. Like dead inventories separated from current assets which will provide benefit for more than one year.

Current Assets

Cutrent assets are item of valued own by the company that will be converted into cash within one year. It includes,

(a) Inventories

Inventory is an accounting term that refers to goods that are in various stages of being made ready for sale, including

● Raw Materials (to be used to produce more finished goods)

● Work In Progress (meaning in the process of being made)

● Finished Goods (that are available to be sold)

(b) Financial Assets

(i) Trade Receivables

It is the amount of money which the company will receive from its customers on accounts of credit sales. Some industries to sell goods on credit and the payment is received after few weeks. 

Such payments that will be received in the future is recorded as trade receivables or account receivables.

(ii) Investment

It includes short term investment done by the company in different securities like mutual funds, fixed deposits, bonds etc. These investments are generally meant for very short term period.

(iii) Cash & Cash Equivalents

It comprises of cash in hand and other assets which can be immediately converted into cash like demand deposits etc.

(iv) Bank Balance

The amount of money lying in the current account and fixed deposits of the bank is recorded under this head.

(v) Loan

The amount of loan given to any sister concerns.

(vi) Other Financial Assets

In includes advanced given for a particular purpose against which goods and services will be in the near future.

(c) Other Current Assets

Other current assets which are not categorized individually are recorded under this head. Like any advance payment of rent or any insurance premium, legal expenses etc. 

Equity & Liabilities

Equity & liabilities consist of what is owned by the company to a owner, lender, bank or another provider of goods and services.

Equity

(a) Share capital

In case of the company, the owner's capital is divided into smaller units called 'shares', collectively known as share capital. Share capital refers the fund raised by company through issuing shares to the public. 

Let, ABC company issued 10,000 shares of Rs 100 per share received Rs 10,00,000 in share capital. 

(b) Other Equity

In refers value of outstanding common equities at par, plus accumulated retained earnings.

(c) Reserve & Surplus

Reserve are usually money earmarked by the company for specific purposes. Surplus is where all the profits of the company reside.

Liabilities

Non Current Liabilities 

These obligations have to be settled in over a year's time. Thus, also known as long term liabilities. It is an important source of a company's long term financing. 

(a) Financial Liabilities

When a company raises funds for financing its assets or business operations, it is called financial liabilities.

(i) Borrowing

The loans & obligations which are not due for one year. It may be in the form of bank loans, debentures etc.

(ii) Other Financial Liabilities

If cash is needed to meet any liabilities, that is called other financial liabilities. Like bank loans etc. 

(b) Provisions

As per the companies act, a business is required to keep aside a certain amount for upcoming large expenses. The company deducts certain part of net profit and keeps it aside for funding such expenses near future.

(c) Deferred Tax Liabilities

There is a different between profit on the books of accounts and taxable profit because certain expenses are not recognized as business expenses under income tax provision. Due to this, the actual tax liabilities can also vary from the estimated calculation.

Current Liabilities

These are the short term obligations that need to be repaid within a year.

(a) Short Term Borrowing

It refers to the amount of money borrowed for a short term period from bank, financial institution for financing the working capital needs.

(b) Trade payables

Trade payables or account payables is the amount of payable to the suppliers of goods or services related to the ordinary course of a business.

(c) Other Current Liabilities

It includes the outstanding expenses other than the obligations directly related to operations, which is due not yet paid. Such as outstanding rent.

(d) Short Term Provisions

The amount kept aside for short term obligations.

(e) Current Tax Liabilities

It refers to the amount of taxes which are already due in current year but not yet paid.