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Balance Sheet

A balance sheet provides a snapshot of a company's financial position at a point in time. It lists a company's assets, liabilities, and equity. Assets are things of value owned, like cash, inventory, or equipment. Liabilities are obligations owed to others, like loans or accounts payable. Equity is the residual claim of net assets by the owners. The accounting equation requires total assets to equal total liabilities plus equity.

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83 views25 pages

Balance Sheet

A balance sheet provides a snapshot of a company's financial position at a point in time. It lists a company's assets, liabilities, and equity. Assets are things of value owned, like cash, inventory, or equipment. Liabilities are obligations owed to others, like loans or accounts payable. Equity is the residual claim of net assets by the owners. The accounting equation requires total assets to equal total liabilities plus equity.

Uploaded by

DHANUSHA BALAKRISHNAN
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BALANCE SHEET

Balance Sheet
• Balance sheet indicates the financial condition or the state of
affairs of a business at a particular point of time.
• More specifically, balance sheet contains information about
resources (assets) and obligations (liabilities) of a business entity
and about its owners' interest (owners' equity) in the business at a
particular point of time, usually at the end of the firms accounting
period.
Assets
• Assets represent economic resources owned by the firm, which can be
measured, in monetary terms.

Assets may be classified as


(1) current assets and
(2) fixed (long - term) assets.
Current Assets
Current Assets
• Current assets- liquid assets, are those resources of a firm, which are
either held in the form of cash or are expected to be converted in cash
within the accounting period or the operating cycle of the business.

• The operating cycle is the time taken to convert the raw materials into
finished goods, sell finished goods, and convert receivables (goods
sold on credit) into cash.
Types of current assets
Current assets include
• Cash is the most liquid current asset. Cash includes actual money in hand and
cash deposits in bank account.

• Marketable securities are the temporary or short-term investments in shares,


debentures, bonds and other securities. These securities are readily marketable
and can be converted into cash within the accounting period.
E.g. Stock, Bonds, Shares
• Accounts receivable (Book debts) are the amounts due from debtors (customers) to
whom goods or services have been sold on credit.

• Bills receivables represent the promises made in writing by the debtors to pay definite
sums of money after some specified period of time. Bills are written by the firm and
become effective when accepted by the debtors. A firm may discount its bills receivables
with a bank and realize cash immediately. The amount of discount is the bank's
commission.
• Stock (or inventory) includes raw materials, work-in-process and
finished goods in case of manufacturing firms.
• Prepaid expenses and accrued incomes - prepaid expenses are the
expenses of future period paid in advance, e.g., prepaid insurance, prepaid
rent, or taxes paid in advance.
• Loan and advances are also included in current assets in India. They
include dues from employees or associates, advances for current supplies
and advances against acquisition of capital assets. Except for the advance
payment for current supplies, it is not proper to include loans and
advances in current assets.
• Loan and advances are also included in current assets in India.
• They include dues from employees or associates, advances for current
supplies and advances against acquisition of capital assets.
• If a party takes out a loan, they receive cash, which is a current asset.
• If a party issues a loan that will be repaid within one year, it may be a current
asset.
• If a party issues a loan that will be repaid after one year, it is not a current
asset.
Fixed Assets

• Fixed or long-term assets - held for periods longer than the


accounting period.
• They are held for use in business, and not for the purpose of
sale.
• Fixed assets would include long term investment and all non-
current assets.
Types of fixed assets
1. Tangible fixed assets: A tangible asset is an asset that has physical
substance. Examples include inventory, a building, manufacturing
equipment or machinery, and office furniture.
• Costs of tangible fixed assets are reduced every year by the amount of
depreciation.
• Depreciating an asset is a process of allocating cost and does not
involve any cash outlay.
2.Intangible fixed assets
• Intangible fixed assets represent the firm’s rights and include patents,
copyrights, franchises, trademarks, trade names and goodwill.

• They are not physical in nature


3. Gross Block
• A gross block is a term used to describe the total worth of all the assets
currently in the possession of a business operation.
• Gross Block Means - Total Value of Asset Its Original Purchase price
4. Long term investments
• Long-term investments represent the firm's investment in shares,
debentures and bonds of other firms or government bodies for profits
and control.
• These investments are held for a period of time greater than the
accounting period.
• Usually, long term investments are shown at the original cost, but the
current market price may also be indicated.
II. LIABILITIES

• Liabilities are debts payable in cash or provide goods or services


by the firm to its creditors or clients in some future period.
• Something a person or company owes, usually a sum of money.

Liabilities are of two types:

1) Current liabilities

2) Long- term liabilities.


Current Liabilities
• Current liabilities are debts payable within an accounting period.
• Current assets are converted into cash to pay current liabilities.
• Amounts due to be paid to creditors within twelve months.
Types of current liabilities
• Sundry creditors : represent the current liability towards suppliers from
which the firm has purchased raw materials on credit.

• Bills payable : promises made in writing by the firm to make payment of a


specified sum to creditors at some specific date. Bills payable have a life of
less than a year.

• Bank borrowings: Banks advance short-term credit to firms for financing


their current assets.

• Provisions - provision for taxes or provision for dividends. Every business


has to pay taxes on its income.
• Expenses payable or outstanding expenses: The firm may owe payments to its

employees and others at the end of the accounting period for the services received in the

current year. E.g. wages payable, and rent payable.

• Income received in advance : A firm sometimes receive income for goods or services
to be supplied in the future.
E.g. Amazon

Installments of long-term loans are payable periodically : They portion of the long
term loan which is payable in the current year will form part of current liabilities.
Long term liabilities
• Long-term liabilities are the obligations or debts payable in a period of
time greater than the accounting period.
Types
1. Debenture: Long term business debt without any collateral

2. Secured loans : Long-term borrowings with fixed assets pledged as


security
3. EQUITY
How much is left over?
how much value is left over once you’ve totaled up everything valuable that
you have, and subtracted everything you owe to your creditors.

When you take all of your assets and subtract all of your liabilities, you


get equity.

For a sole proprietorship or partnership, equity is usually called 


“owners equity” on the balance sheet.
 In a corporation, equity is shareholders’ equity.
1.Shareholders: real owners
• Preference shareholders : preference when profits are shared in the
form of dividends. They receive dividends even in instances of loss.
• Equity shareholders : receiving dividends only when a company is
earning profit.
2. Reserves and surplus
• The second part of the owners' equity is referred to as retained
earnings or reserves and surplus.
• Reserves are the funds earmarked for a specific purpose, which the
company intends to use in future.
• The surplus is where the profits of the company reside.
1.Shareholders’ equity = Share capital + Reserves + Surplus.
2.Equity is the claim of the owners on the assets of the company.
3. It represents the assets that remain after deducting the liabilities

If you rearrange the Balance Sheet equation,


4.Equity = Assets – Liabilities.
2. Assets= liabilities + equity

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