How would you know your depreciated business car value as on today..!
How do you know the value of the Term loan you became due to the State Bank of India..!
Whether it may be an asset or liability or equity, you must prepare a Balance sheet to know all the above values.
1. What Is a Balance Sheet?
The balance sheet is a Financial Statement that shows
– How much value of Assets the business owns.
– How much value of Liabilities the business has.
– How much value of Money, the shareholders invested into the business and a lot more.
Simply, it shows the complete picture of what the business owns and what the business owes.
I.e. Assets, Liabilities, Reserves, Capital, and other balances at their Book values.
It is a great tool for Analysis of business performance.
Usually, the Balance sheet will be prepared at the end of the financial year to know the Financial position of the business enterprise at a certain period of time. I.e. usually on the 31st March of every year.
2. Key Elements & Components of a Balance Sheet
The 3 key components of the Balance Sheet normally consist of
- Equity and
Assets are broadly classified into 2 categories
- Non-current Assets and
- Current Assets
Equity and Liabilities are broadly classified into 4 Categories
- Shareholder’s Funds
- Share Application money pending Allotment
- Non-current Liabilities and
- Current Liabilities
3. What is the Purpose of a Balance Sheet?
A Balance sheet describes the Financial health of the organization.
The purpose of a Balance sheet is to find out a clear picture of a company’s Financial position at a certain period of time.
It also helps in preparing business plans or making financial decisions.
From the balance sheet, We can also easily prepare Liquidity & Solvency ratios which can be helpful for financial analysis like Debt-Equity ratio, Current ratio, etc.,
4. Balance sheet Formula & Equation
The sum of Total Assets is always equal to the Sum of Liabilities & Equity.
It is based on a double entry system of recording.
The Formula to be used for the Balance sheet is as follows:
Total Assets = Total Liabilities + Total Shareholder’s funds
It means all the Debit side total must be equal to the Credit side total [ Dr side total = Cr side total ]
It is also known as the “Accounting Equation”
5. How to Prepare a Balance Sheet?
Below are the steps one needs to follow for the preparation of a Balance sheet.
As you know nowadays, the entire process of Accounting is automated through the use of Accounting software but one should understand how a Balance sheet will be prepared to reduce potential errors.
A. Determine the Reporting date & Period
As a Balance sheet represents Total Assets, Liabilities, and Equity positions at a specific date i.e. at the “Reporting Date”
Reporting date represents the day on which the position of assets & liabilities are reported.
The Balance sheet is normally prepared for a period of 12 months. In India, We usually prepare from the 01st of April to the 31st of March of every year. We use the Financial year for the preparation of the Balance sheet.
Large companies, who trade on National Stock Exchanges (NSE), Bombay Stock Exchange Limited (BSE), Banks, and Insurance companies prepare their Balance sheet mostly on a Quarterly basis.
You can see in newspapers like
“State Bank of India declared Q3 results with a profit of Rs.227 Crores”
Why do Large companies prepare Balance sheets on a Quarterly Basis?
The answer is simple, they can have complete control of the business and if they prepare financial statements on a quarterly basis, the companies can prepare their Financial statements at the end of the period quite easily and quickly. So, there will be no chance of work delay.
Large companies operate on a Financial year basis, the quarterly dates are as follows
1. Q1 – 30th June
2. Q2 – 30th September
3. Q3 – 31st December
4. Q4 – 31st March
For Medium & Small enterprises, they usually prepare their Balance sheet on 31st March as their reporting date.
C. Identify your Assets
After identifying the reporting date, you should identify the value of your assets and tally it.
The balance sheet is typically split into 2 Categories
2. Liabilities & Equity
One should tally both assets and liabilities & equity to prepare a Balance sheet.
Assets are categorized into the following line of items.
- Current investments
- Trade receivables
- Cash and cash equivalents
- Short-term loans and advances
- Other current assets
- Property, Plant, and Equipment [and Intangible assets]
(i) Property, Plant, and Equipment
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
- Non-current investments
- Deferred tax assets (net)
- Long-term loans and advances
- Other non-current assets
Both Current assets & Non-current assets should be subtotaled and totaled together.
D. Identify your Liabilities
In the same way, you need to identify your business liabilities.
- Short-term borrowings
- Trade payables
- Other current liabilities
- Short-term provisions
- Long-term borrowings
- Deferred tax liabilities (Net)
- Other Long term liabilities
- Long-term provisions
Both Current liabilities & Non-current liabilities should be sub-totaled and totaled together.
E. Ascertain Shareholder’s Funds
In case the company issues shares to the general public, then shareholders’ equity will be a little complicated computation.
The line of items in the Shareholders’ fund includes:
1. Common Stock
2. Preferred Stock
3. Treasury Stock
4. Reserves and Surplus
5. Money received against share warrants
F. Finally add Total Liability & Equity and Compare them with Total assets
Finally, to ensure the Balance sheet is balanced, it is necessary to compare total liabilities and equity with the Total assets. Both must be equal.
Then the Balance sheet will be ready.
6. Balance Sheet Format
In case of Companies, the Balance sheet is to be prepared as per Schedule III of the Companies Act,2013.
Format of the Balance sheet:
PART I – BALANCE SHEET
Name of the Company…………………….
Balance sheet as at ………………………
|Particulars||Note No.||Figures as at the |
end of the previous
|Figures as at the |
end of the previous
|I. EQUITY AND LIABILITIES|
|(1) Shareholders’ funds|
|(a) Share capital||xxx||xxx|
|(b) Reserves and surplus||xxx||xxx|
|(c) Money received against share warrants||xxx||xxx|
|(2) Share application money pending allotment||xxx||xxx|
|(3) Non-current liabilities|
|(a) Long-term borrowings||xxx||xxx|
|(b) Deferred tax liabilities (Net)||xxx||xxx|
|(c) Other Long term liabilities||xxx||xxx|
|(d) Long-term provisions||xxx||xxx|
|(4) Current liabilities|
|(a) Short-term borrowings||xxx||xxx|
|(b) Trade payables||xxx||xxx|
|(c) Other current liabilities||xxx||xxx|
|(d) Short-term provisions||xxx||xxx|
|(1) (a) Fixed assets||xxx||xxx|
|(i) Tangible assets||xxx||xxx|
|(ii) Intangible assets||xxx||xxx|
|(iii) Capital work-in-progress||xxx||xxx|
|(iv) Intangible assets under development||xxx||xxx|
|(b) Non-current investments||xxx||xxx|
|(c) Deferred tax assets (net)||xxx||xxx|
|(d) Long-term loans and advances||xxx||xxx|
|(e) Other non-current assets||xxx||xxx|
|(2) Current assets|
|(a) Current investments||xxx||xxx|
|(c) Trade receivables||xxx||xxx|
|(d) Cash and cash equivalents||xxx||xxx|
|(e) Short-term loans and advances||xxx||xxx|
|(f) Other current assets||xxx||xxx|
I hope you understood the “Balance sheet” concept.
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Author is a Qualified CMA with rich industry experience for more than 6 years. He is an All India Ranker (AIR-101) in CMA and also a Semi-Qualified Chartered Accountant having a quite good experience in teaching the subjects of Accounting and Costing to the commerce aspirants.