BALANCE SHEET Balance Sheet: Balance sheet is a financial showing firm’s assets and liabilities at a given point of time, say 31 march of a year. It tells us about the financial health of a firm. It tells what the firm owns and what it owes. Whatever a firm owns are assets and what it owes are liabilities. The difference of assets and liabilities is called as shareholder’s equity or net assets or owner’s equity. From this discussion we get the following relation that is BALANCE SHEET Assets – liabilities = owner’s equity. Assets = liabilities + owner’s equity A balance sheet represents the accounting balances on assets and liabilities side and not the true value. True value means that if a firm has purchased a land 20 years before than balance taken in balance sheet is the amount invested at the time of purchase. The true value of land at the time of preparation of balance sheet would be much more than the value of land at its purchase. Balance sheet helps us to know the following about the financial health of a firm. Solvency position. It is the capacity of firm to meet its obligations. Profits made by the firm in the past and past trends Credit worthiness. Balance sheet can be prepared either in a horizontal format or a vertical format.in case of banking companies the format of balance sheet is prescribed by the banking regulation act. Balance sheet horizontal format LIABILITIES ASSETS Owners capital Fixed assets Long term liabilities Investments Current liabilities Current assets Non-current assets Other assets Intangible assets Components of balance sheet: components of a balance sheet are given in the table above and described below. LIABILITIES Owner’s capital: It is the contribution mad by the owners of the firm. The profit earned and retained is also added under this. It also includes: Reserve and surplus: Includes the profit retained, provisions made for some particular purpose. Share capital money: It is the amount raised by selling equity above its face value. Share application money: Money intended to be used for issuance of shares. Preferred stock: stock having preference over common stock during liquidation of firm. Long term liabilities: Liabilities which are to be paid by the firm beyond a repayment period of one year. The liabilities may be secured or unsecured. These are generally raised to invest in fixed assets like plant and machinery, land and building. Current liabilities: Liabilities which are repaid during a period of one year. They generally include sundry debtors and other liabilities. ASSETS Fixed assets: Investment made in plant and machinery, land and building required to run the operations of the firm. The investment in these assets is usually made through owners’ equity and long term liability. Investments: Amount invested by the firm in its own subsidiaries or other companies. These are the financial securities owned by the firm. Non-current assets: Securities in which the investment done is realized beyond a period of one year. Current assets: Consists of cash and other sources of fund which gets converted into cash during one business cycle of the firm. These are 1. Cash 2.Inventory 3. Account receivables. Intangible assets: Assets like goodwill, copyright etc. whose value is difficult to determine and depends on managements view.
