How to read a Balance sheet of company

What is Balance Sheet | How to read Balance Sheet ?

What is Balance sheet ?

Before we go further we have to understand that in Indian Financial year start from 1 April ___ and end on 31 march___

The company shows is result on 31 March annually but if company only shows result of company only annually then its becomes very difficult for shareholders to know the growth of company therefore it is mandatory for company to show its result quarterly .

What is quarter result of company ?

Quarter means every 3 month therefore the year is divided into 4 quarter in year as shown below.

Description

Period

April-May-June

Quarter 1

July-August-September

Quarter 2

October-November-December

Quarter 3

January -February- March

Quarter 4

 

 

 

Balance Sheet 

Balance sheet is a financial statement that reports a company’s assets, liabilities, and shareholder equity. The balance sheet is one of the three core financial statements that are used to evaluate a business. It provides a snapshot of a company’s finances (what it owns and owes) as of the date of publication.

The assets on the left will equal the liabilities and equity on the right. A balance sheet reflects the number of assets and liabilities at the final moment of the report or accounting period.

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What are assets ?

What are assets ?

Assets are those which we have control right and which we own and in coming future that will gives us some economic benefits.

Anything which is in the possession or is the property of a business enterprise including the amount due to it from other is called as asset.

In other word, anything which will enable a business enterprise to get cash or benefits in future is an asset.

What are liabilites ?

It refers to the amount which the firm owes to outsiders .In the words of Finney and Miller “Liabilities are debts they are amounts owned to creditors “

This can be expressed as 

Liabilities = Assets – Equity

Thus when a firm purchase goods on credit from A, the amount owing 

 

 

Shareholders' funds

When a company need money, they need some funds that can be taken from bank as loan and pay interest on loan. Other way is equity financing where, you can give share to some investor against money invested by them, and they  became partner of the company.

Types of Shareholders 

  • Preference shareholders

They are given part of profit as preferential Dividend. It is mandatory to give Preferential dividend to Preference shareholders.

  • Common shareholders.

They may not or may not be given dividend based on company performance.

Shareholders’ funds refers to the amount of equity in a company, which belongs to the shareholders. The amount of shareholders’ funds yields an approximation of theoretically how much the shareholders would receive if a business were to liquidate. The amount of shareholders’ funds can be calculated by subtracting the total amount of liabilities on a company’s balance sheet from the total amount of assets.

They are Liability because the company has to pay it to shareholder when they want their money.

Reserve and surplus

When company make profit it gives some part as dividend to its shareholders and other they keep it with itself known as reserve and surplus.

Reserves and Surplus are all the cumulative amount of retained earnings recorded as a part of the Shareholder’s Equity and are earmarked by the company for specific purposes like buying of fixed assets, payment for legal settlements, debts repayments or payment of dividends etc.

Non-Current Liabilities

Non-current liabilities are referred to as the long-term debts or financial obligations that are listed on the balance sheet of a company. These are also known as long-term liabilities. These obligations are not due within twelve months or accounting period, as opposed to current liabilities, which are short-term debts and are due within twelve months or the accounting period.

Long-term borrowing

Long-term borrowing consists of a long application process where repayments are made for several years in order to pay off the loan. This loan is borrowed to fulfill the business needs on a large scale.

A deferred tax liability

A deferred tax liability is a listing on a company’s balance sheet that records taxes that are owed but are not due to be paid until a future date.

Taxes paid in Future but not paid in past.

Other Long Term Liabilities :

It includes some offices or building taken on lease or things not included in long-term borrowing .

Long-term Provisions:

It is an amount that is kept aside to meet future liability with an amount that is difficult to ascertain but may be estimated and only in case if liability will arise after 12 months or after the period of operating cycle. Example : If loan taken from bank and fail to pay loan then  some money is keep aside in case of default of loan to pay debts.

CURRENT LIABILITIES

Current liabilities are a company’s short-term financial obligations that are due within one year or a normal operating cycle

 

Short-term provision

Short term provisions are the provisions for liabilities that are likely to be paid within 12 months from the date of the balance sheet or within the period of the operating cycle, whichever is longer.

The examples of Short-term Provisions are Provision for discount on debtors, Provision for tax, doubtful debts etc.

Trade Payable

A trade payable is an amount billed to a company by its suppliers for goods delivered to or services consumed by the company in the ordinary course of business. Trade payables are nearly always classified as current liabilities.

Other current liabilities


Other current liabilities are the residual liabilities of an organization that are not classified within one of the other current liability accounts. It is a line item in the balance sheet, in which is aggregated several current liability accounts that are too minor to report separately.
Examples of other current liabilities shall include:

  • Advances from customers.
  • Unpaid services and materials for previously invoiced projects.
  • Accrued distributor.
  • Expenses payable

Non-Current Asset

Non-Current Assets Definition:
A non-current asset is an asset that the company acquires or invests, but the value of that investment does not recur within an accounting year. These type of investments lasts for long and cannot be easily liquidated into cash and can generate economic benefits to the company for more than a year.

Examples of noncurrent assets include investments, intellectual property, real estate, and equipment.

Tangible assets

Tangible assets are physical; they include cash, inventory, vehicles, equipment, buildings and investments.

Intangible assets

Intangible assets do not exist in physical form and include things like accounts receivable, pre-paid expenses, and patents and goodwill.

 

Capital work in progress


Capital work in progress represents costs incurred to date on a fixed asset that is still under construction at the balance sheet date. The costs being incurred on such assets cannot be recognized as an operating asset until they qualify as a ready to use asset. All costs incurred on assets under construction are recorded as capital work in progress and on completion and readiness of asset these are transferred to “Operating Fixed Assets” account.

Current Assets

Current assets are all the assets of a company that are expected to be sold or used as a result of standard business operations over the next year. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.

Current Investment

A current investment is an investment that is by its nature readily realizable and is intended to be held for not more than one year from the date on which such investment is made.

Inventory

Inventory refers to a company’s goods and products that are ready to sell, along with the raw materials that are used to produce them. Inventory .

Cash and cash equivalents
Cash and cash equivalents refers to the line item on the balance sheet that reports the value of a company’s assets that are cash or can be converted into cash immediately. Cash equivalents include bank accounts and marketable securities such as commercial paper and short-term government bonds.

Short-term loans

Short-term loans and advances are current assets because loans. Advances on asset side are those advances which are paid for now but realize at future date. So it is an asset to the company. And Loan on assets side ate those loans which are given by the company and to be recovered in future with interest.

Contingent liabilities

Contingent liabilities
that depend on the outcome of an uncertain event, must pass two thresholds before they can be
reported in financial statements. First, it must be possible to estimate the value of the contingent
liability. If the value can be estimated, the liability must have greater than a 50% chance of being
realized. Qualifying contingent liabilities are recorded as an expense on the income statement
and a liability on the balance sheet.

Bonus Equity Share Capital

Bonus Equity Share Capital Bonus shares are complimentary, fully paid shares issued to the existing shareholders of the company, based on the proportion of their current holding. Bonus shares are paid out to shareholders from the free reserves of the company.

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