Financial Statement Analysis

Concepts for Balance Sheet

Preparation and Its Contents
 Balance Sheet
Meaning
A Balance Sheet is one of the financial statements. A Balance Sheet is a
statement of assets and liabilities of an enterprise at a given date. It is also
called Statement of Financial Position.

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Features of Balance Sheet
• A balance sheet is only a statement and not an account. It has no
debit side or credit side. The headings of the two sides are ‘Assets’ and
‘Liabilities’.

• It is prepared at a particular point of time and not for a particular

period. The information contained in it is true only at the particular
point of time at which it is prepared.

• It is a summary of balances of those ledger accounts which have

not been closed by transfer to the Trading and P & LAccount.

• It shows the nature and value of assets and the nature and the
amount of liabilities at a given date.
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Need of Balance Sheet
• To ascertain the nature and value of assets of a business.

• To ascertain the nature and amount of liabilities of a business.

• To find out the financial solvency of an enterprise. An enterprise
is considered to be a solvent if its assets exceed its external
liabilities.

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Reliance-
Chairman’s
Statement
(Source: Annual Report)

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Sample of Horizontal Format

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 1. The Entity Concept
1. Business enterprise is a separate identity apart from its owners.

2. Business is distinct from owners.

3. Business transactions are

recorded in business books of

accounts and owner’s

transactions in his personal books

of accounts.

4. The examples of entity includes proprietorship firm, partnership firm,

limited liability company, trusts, clubs, societies, private limited
companies, and public limited companies.

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 1. The Entity concept
5. Enterprise is liable to the owner for the money contributed/given to the
enterprise for doing business.
6. Since owner invested capital in the enterprise and takes risk he has claim
on profits of the enterprise also.

7. Obligation of enterprise towards owner is shown as below in the Balance

Sheet.

Balance Sheet (Proprietary Firm) Balance Sheet (Company)

Liabilities Assets Equities and Liabilities
Capital
Shareholders’ Funds
(-) Drawings
(a.) Share Capital
(+) Profit

(-) Loss (b.) Reserves & Surplus

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2. Money Measurement Concept
1. Only those transactions that can be measured in terms of
money are recorded in books of accounts.

2. Measuring unit for money is taken as the currency of the

ruling country.

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 3. Going Concern Concept
1. The business will continue in operation for the foreseeable future.
2. It is believed that enterprise has neither the intention nor the need to close
down the business or liquidate the business.

3. By virtue of this concept increase/decrease in the value of assets in the

short run is ignored.

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 4. Cost Concept
1. The value of the non current asset is to be determined on the basis of
original cost incurred by the company to purchase and bring the asset in
the working condition for its intended use. This cost is known as ‘Historic
Cost’.

2. Non current assets are booked at historical cost when acquired and
gradually in a systematic manner part of the cost is reduced due to
amortization. Reduced portion of cost is generally known as depreciation.

For Example - Balance Sheet

Liabilities Assets

Plant & Machinery

(cost) Less:
Depreciation
Book value

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Accounting Convention - Godrej

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5. The Dual – Aspect Concept
 Every transaction affects at least two items of accounting records known as
dual impact of transaction.
 Accounting systems are set up so as to record both of these impacts of a
transaction preserving the equality of accounting equation.

 Accounts are prepared on double entry system.

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Contents of Balance Sheet

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 Basic Accounting Terms
1. Transaction – Events that affect the numbers in
an entity’s accounting records are called
transactions. It involves transfer of money

or money’s worth.
2. Entity – An entity means an economic unit that

performs economic activities (e.g. TESCO,

TELCO, Birla Industries, Reliance Industries,

Bajaj Auto, Raymond).

3. Entry – Entry is the record made in the books of

accounts in respect of a transaction or event. An
entry is passed on the basis of vouchers.
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Basic Accounting Terms
4. Voucher – Voucher is a document which serves as an evidence of a
transaction. For example, in case of cash purchases, cash memos and in
case of credit purchases, purchase invoice are vouchers.

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 Items of B/S: Equity & Liabilities
Equity is the residual interest of owners in the assets of the entity after
deducting all its liabilities. It is also called Shareholders’ Fund or Capital.
Liability is a present obligation of the arising from past events, the settlement of
which is expected to result in an outflow from the entity of resources embodying
economic benefits.

Shareholders’ Funds
(a) Share Capital - It is the amount contributed
by the shareholders towards the company’s
capital and is entered in the company’s share
capital account.

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Items of B/S - Equity & Liabilities

(b) Reserves and Surplus –

It is a profit achieved by a company where a certain amount of it is put
back into the business which can help the business in their rainy days.

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Items of B/S – Non-Current Liabilities
Those obligations that do not meet the criteria for being classified as
current liabilities are simply called non-current liabilities. For e.g.
Mortgage, bonds and long term leases etc.

(a) Long-Term Borrowings – Loans taken for a time period exceeding 12

months are classified as long term borrowings.

(b) Deferred Tax Liabilities - The tax effect of

taxable temporary differences is recognized as
deferred tax liabilities which are payable beyond 1
year period.

(c) Long-Term Provisions – It includes Provision for Employee Benefits.

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 Items of B/S – Current Liabilities
These are normally paid by using existing current
assets, creating other current liabilities or fulfilling
contractual obligations to provide goods or services.

E.g. Bills Payables, Trade Payables, Bank Overdraft etc.

(a)Short-Term Borrowings – It includes Loans repayable on demand from

banks and other loans payable within duration of 12 months like commercial
papers.

(b) Trade Payables - The trade payables show the amounts owed to suppliers
for purchases of goods and services on credit.

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Items of B/S – Current Liabilities
(c) Other Current Liabilities – It may include advances from customers and
other short term obligations of the company.

(d) Short-Term Provisions – Provision for Employee Benefits, Proposed

Dividend, Provision for Tax on Distributed Profit.

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Items of B/S - Assets
An asset is a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the
entity.

For e.g. Land, Building, Machinery, Equipment etc.

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 Items of B/S – Non-Current Assets
(a) Fixed Asset - A fixed asset is an asset held with the intention of being used
for the purpose of producing or supplying goods or services and is not held for
sale in the normal course of business.

 Tangible Fixed Assets – These have physical existence and can be seen
and felt. For e.g. Land, Buildings, Furniture, Equipment etc.
 Intangible Fixed Assets – These are an identifiable non-monetary assets,
without physical substance, held for use in the production or supply of goods
or services, for rental to others, or for administrative purposes. For e.g. Brand
Names, Copyrights, Goodwill, Patent etc.

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Items of B/S – Non-Current Assets
Capital Work-In-Progress – It is referred to as assets under construction
that is not considered to be final product but must still be accounted for
because funds have been invested towards its production.

(b) Non-Current Investments – It is the investment which is for long period

and not releasable for current period. For e.g. investment in equity
instruments (subsidiary companies, associate companies), joint venture and in
preference shares and in partnership firm.

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Items of B/S – Non-Current Assets
(c) Long-Term Loans and Advances –

It includes secured and unsecured loans and

advances with a duration of more than 12 months.

(d) Other Non-Current Assets –

It includes secured and unsecured interest accrued on loans.

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Items of B/S – Current Assets
Cash and other assets that are expected to be

realized in cash or sold or consumed during

the normal operating cycle of the entity or within
one year, whichever is longer, are called current assets.
(a) Current Investment – A current investment that is by its nature readily
realisable and is intended to be held for not

more than one year from the date on which

such investment is made.

For e.g. Investment in Mutual Funds.

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 Items of B/S – Current Assets
(b) Inventories – Inventories are assets which held
for sale in the ordinary course of business; in the process
of production for such sale or in the form of materials or
supplies to be consumed in the production process

or in the rendering of services.

(c)Trade Receivables – It includes the amounts receivable from customers for
sales of goods or services on credit.

(d) Cash and Bank Balances – It shows receipts and payments of cash. Cash
includes coins, currency, cheques and amounts deposited in banks.

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Items of B/S – Current Assets
(e) Short-Term Loans and Advances – It includes loans and advances like
loans to employees, advances to suppliers, loans and advances to subsidiary
and associate companies etc.

(f) Other Current Assets – It includes interest accrued on loans and deposits
and other receivables.

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