WHAT IS A BALANCE SHEET? A Statement showing the ‘Assets’ and‘Liabilities’ of a business at a certaindate.
AND,WHY DOES LIABILITIES HAVETO BE EQUAL TO ASSETS??
What assets do you have?Cash, a car, computer, stereo, ipod?Let’s say all the above is valued at 7,00,000Does that mean you are worth 7,00,000?NO. Because you owe money to:Let’ say you owe me 1,00,000 and you owe the bank 3,00,000 for a personalcar loan.That means you owe 4,00,000.So you own 7,00,000 in assets but owe 4,00,000 (liabilities).Therefore, you are only really worth (7,00,000-4,00,000) 3,00,000 (owner’sequity).Therefore, we can say that:Assets – Liabilities = Owner’s EquityOr we can re-write that to read:Assets = Liabilities + Owner’s Equity.
BACK TO BALANCE SHEETS.Here’s an Exhaustive List of theItems in a Balance Sheet.
BALANCE SHEET AS ON ……Sources Of Fund:Share Holder’s Fund-Share Capital. xxxReserve and Surplus. xxxNon- Current Liabilities-Long Term Borrowings. xxxDeferred Tax Liabilities. xxxSecured Loans. xxxUnsecured Loans. xxxLong Term Provisions. xxxCurrent Liabilities-Short Term Borrowings. xxxTrade Payables. xxxShort Term Provisions. xxxOther Current Liabilities. xxxTotal-
Application Of Fund:Fixed Assets-Tangible Assets. xxxIntangible Assets. xxxCapital Work-in-progress. xxxIntangible Assets under development. xxxNon Current Investments. xxxLong Term Loans and Advances. xxxOther Non Current Assets. xxxCurrent Assets-Current Investments. xxxInventories. xxxTrade Receivables. xxxCash and Cash Equivalents. xxxShort Term Loans and Advances. xxxOther Current Assets. xxxTotal-
AND FINALLY:GLOSSARY- Share Capital- The amount of share capital a companyreports on its balance sheet only accounts for the initialamount for which the original shareholders purchased theshares from the issuing company. Any price differencesarising from price appreciation/depreciation as a result oftransactions in the secondary market are not included.For example, suppose ABC Inc. raised $2 billion from its initialpublic offering. Over the next year, the total value of its sharesincreases to $5 billion. In this case, the value of the sharecapital is still only $2 billion because ABC Inc. had receivedonly $2 billion from the sale of its securities to the investingpublic.
Reserves and surplus- At the end of an accounting periodthe company may decide to transfer part of the profits to areserve and retain the balance in the profit and loss account. Thereserve created out of profits transferred from profit and lossaccount is called general reserve. The balance in the profit andloss account is called a surplus and will be shown under thishead in the balance sheet.The company can use the general reserve for various purposesincluding issue of bonus shares to shareholders and payment ofdividend when profits are insufficient.The premium received when shares are issued at a premium tothe face value is shown under the head reserves and surplus. Deferred Tax Liabilities- Because there are differencesbetween what a company can deduct for tax and accountingpurposes, there will be a difference between a companys taxableincome and income before tax. A deferred tax liability records thefact that the company will, in the future, pay more income taxbecause of a transaction that took place during the currentperiod, such as an installment sale receivable.
Secured Loans and Unsecured Loans- If a loan is‘secured’, it means it is secured against something you own (an‘asset’) – and failing to repay the loan could result in the lendertaking possession of that asset, and selling it to cover theirlosses. An unsecured loan does not require you to secure anythingagainst the loan – the lender relies on your contractual obligationto pay it back.Because there is no security and the risk they are taking istherefore greater, the amount you can borrow tends to be less, andthe repayment period is usually shorter. Provisions- Money earmarked for potential future expenses. Asum set aside in the accounts of an organization in anticipation ofa future expense, often for doubtful debts is called Provisions.Could be Long Term as well as Short Term. Trade Payables- Liabilities owed to suppliers for purchases orservices rendered. More commonly referred to as AccountsPayable.
Intangible Assets- An asset that is not physical in nature.Corporate intellectual property (items such aspatents, trademarks, copyrights, businessmethodologies), goodwill and brand recognition are all commonintangible assets in todays marketplace. Work-in-Progress- Material that has entered the productionprocess but is not yet a finished product. Work in progress (WIP)therefore refers to all materials and partly finished products thatare at various stages of the production process. Non-current Investments- A Company’s long terminvestments. Trade Receivables- Accounts receivable also known asDebtors, is money owed to a business by its clients (customers)and shown on its balance sheet as an asset. It is one of a seriesof accounting transactions dealing with the billing ofa customer for goods and services that the customer hasordered.
HOPE WE COULD HELP YOUUNDERSTAND THE BALANCESHEET.