What is a Balance Sheet?

A balance sheet (BS) displays the company’s total assets and how the assets are financed,
either through debt or equity. It gives us an idea of the financial health of an organisation . It
is like a snapshot of the financial position at a specified time A balance sheet consists of three
components:
Assets
Equity
Liabilities
A balance sheet is based on the fundamental equation: Assets = Equity + Liabilities
This is also the golden rule of Finance!
Now let’s dig into each line item on the balance sheet and understand why the balance sheet
always tallies.
Let’s see what an actual balance sheet looks like.
8/19/24, 11:30 AM Tata Motors | Standalone Balance Sheet > Auto - LCVs & HCVs > Standalone Balance Sheet of Tata Motors - BSE: 500570, NSE: TATAMOTORS

Tata Motors Previous Years

Standalone Balance Sheet ------------------- in Rs. Cr. -------------------
Mar 24 Mar 23 Mar 22 Mar 21 Mar 20

12 mths 12 mths 12 mths 12 mths 12 mths

EQUITIES AND LIABILITIES

SHAREHOLDER'S FUNDS
Equity Share Capital 766.50 766.02 765.88 765.81 719.54
Total Share Capital 766.50 766.02 765.88 765.81 719.54
Reserves and Surplus 29,374.83 21,701.37 19,171.88 18,290.16 16,800.61
Total Reserves and Surplus 29,374.83 21,701.37 19,171.88 18,290.16 16,800.61
Money Received Against Share Warrants 0.00 0.00 0.00 0.00 867.50
Total Shareholders Funds 30,141.33 22,467.39 19,937.76 19,055.97 18,387.65
Equity Share Application Money 1.72 2.46 6.39 0.00 0.00
NON-CURRENT LIABILITIES
Long Term Borrowings 5,235.67 10,445.70 14,102.74 16,326.77 14,776.51
Deferred Tax Liabilities [Net] 49.78 51.16 173.72 266.50 198.59
Other Long Term Liabilities 1,392.16 1,411.78 1,212.34 1,786.93 1,646.56
Long Term Provisions 1,936.92 1,588.75 1,474.11 1,371.94 1,769.74
Total Non-Current Liabilities 8,614.53 13,497.39 16,962.91 19,752.14 18,391.40
CURRENT LIABILITIES
Short Term Borrowings 8,535.37 8,426.74 9,129.91 5,421.95 6,121.36
Trade Payables 8,826.46 7,162.60 6,102.10 8,115.01 8,102.25
Other Current Liabilities 8,830.41 9,805.30 11,152.74 11,671.05 10,180.46
Short Term Provisions 1,133.92 408.89 608.06 1,043.54 1,406.75
Total Current Liabilities 27,326.16 25,803.53 26,992.81 26,251.55 25,810.82
Total Capital And Liabilities 66,083.74 61,770.77 63,899.87 65,059.66 62,589.87
ASSETS
NON-CURRENT ASSETS
Tangible Assets 11,990.26 12,129.14 12,065.89 19,922.06 19,540.25
Intangible Assets 2,353.79 2,413.18 2,009.87 6,501.04 5,667.73
Capital Work-In-Progress 645.03 575.65 585.21 1,400.82 1,755.51
Intangible Assets Under Development 588.92 509.30 882.03 1,605.64 2,739.29
Fixed Assets 15,578.00 15,627.27 15,543.00 29,429.56 29,702.78
Non-Current Investments 30,315.57 29,181.62 29,256.39 16,114.91 15,730.86
Deferred Tax Assets [Net] 1,558.65 1,477.26 0.00 0.00 0.00
Long Term Loans And Advances 101.89 114.40 48.43 72.39 138.46
Other Non-Current Assets 3,321.96 3,870.27 3,432.44 3,588.21 3,449.01
Total Non-Current Assets 50,876.07 50,270.82 48,280.26 49,205.07 49,021.11
CURRENT ASSETS
Current Investments 1,993.50 3,142.96 5,143.08 1,578.26 885.31
Inventories 3,470.38 3,027.90 3,718.49 4,551.71 3,831.92
Trade Receivables 2,765.16 2,307.72 2,111.78 2,087.51 1,978.06
Cash And Cash Equivalents 5,150.96 1,414.65 2,605.43 4,318.94 3,532.19
Short Term Loans And Advances 132.19 132.29 139.37 184.49 232.14
OtherCurrentAssets 1,695.48 1,474.43 1,901.46 3,133.68 3,109.14
Total Current Assets 15,207.67 11,499.95 15,619.61 15,854.59 13,568.76
Total Assets 66,083.74 61,770.77 63,899.87 65,059.66 62,589.87
OTHER ADDITIONAL INFORMATION
CONTINGENT LIABILITIES, COMMITMENTS

Contingent Liabilities 2,667.64 2,515.88 3,353.04 3,694.20 4,737.19

CIF VALUE OF IMPORTS
EXPENDITURE IN FOREIGN EXCHANGE
Expenditure In Foreign Currency 1,217.86 1,297.57 1,983.68 2,159.77 2,946.64
REMITTANCES IN FOREIGN CURRENCIES FOR
DIVIDENDS
Dividend Remittance In Foreign Currency - - - - -
EARNINGS IN FOREIGN EXCHANGE
FOB Value Of Goods - - - - -
Other Earnings 3,073.96 2,979.25 4,006.60 2,181.66 3,144.88
BONUS DETAILS
Bonus Equity Share Capital 111.29 111.29 111.29 111.29 111.29
NON-CURRENT INVESTMENTS
Non-Current Investments Quoted Market
856.59 574.37 718.49 446.23 140.96
Value
Non-Current Investments Unquoted Book
729.53 630.45 620.45 521.42 407.61
Value
CURRENT INVESTMENTS

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The first part of the BS is assets. Assets are the resources or things a company owns. They
can be divided into current as well as non-current assets or long-term assets.
Non-Current assets: Assets that cannot be easily converted to cash, like buildings,
machinery, etc.
Current Assets: Assets that can be easily converted into cash within a year. For example,
short-term deposits, marketable securities, and stock.
The first line item of non-current assets is property, plant, and equipment (PP&E). PP&E
captures the company’s tangible fixed assets. Tangible assets are those that can be seen and
felt. They have a physical form.
The line item is a recorded net of accumulated depreciation. PP&E is classified into different
types of assets, like land, buildings, office equipment, vehicles, computers, etc. All PP&E is
depreciable except for land.

The next line item is Capital Work in Progress (CWIP): Those assets that are in the
construction phase or are being built are termed CWIP. These assets will move to PP&E once
construction is completed.
High CWIP as a percentage of PPE can also be used as a screening filter for selecting
companies, as a high CWIP will eventually mean a company is adding a new plant and will
generate more revenue in the near future.
The other item is intangible assets. This line item includes all of the company’s intangible
fixed assets, which may or may not be identifiable. Intangible assets include patents, licences,
brands, software, and goodwill.
It also includes goodwill due to the acquisition of another company, for example, Company
A buys Company B for ₹100 cr. However, the net asset of Company B is ₹80 cr., the
remaining ₹20 cr. is goodwill which will be shown under goodwill in Company A balance
sheet.
Investors need to be careful with companies where intangible assets make up a high
percentage of total assets because valuations of intangible assets are done on the basis of
assumptions.
The management can easily fool the investors by making acquisitions at a high cost and
recording goodwill in books.
Let's understand it with the example of a U.S. based company, Teladoc Health. Teladoc is a
pioneer in virtual doctor visits. If we look at the financials of the company, it has goodwill in

its books, which is more than 80% of the total assets of the company.
In March 2022, it had written off $6.6 billion of goodwill, which was in the books due to the
company's acquisition of remote health monitoring company, Livongo. The share price of the
company has fallen by more than 50% since the date of the results.
Another such example from the Indian market is Quess Corp. If we look into its financials in
FY2019, the company has total intangible assets of ₹1,435 cr. which is more than 28% of its
total assets.
Then, if we move a year forward, they have also impaired goodwill in exceptional items and
written off ₹ 660 cr. of goodwill from the balance sheet in FY2020
The next line is investment. All those investments that are held by the company include
investments in equity, debt, bonds, debentures, etc. It has two parts:

Non-Current Investments: If holding for more than 1 year.

Current Investments: If holding for less than 1 year.
For example, PI Industries has acquired some companies, so that will be shown here under
non-current investments.
The next item is Other Financial Assets.
It includes loans and advances, which include loans to related parties or loans to employees.
It also covers deposits to government authorities or security deposits for leases. It also
includes advances given to suppliers.
With these we complete the non-current assets section. Now, let’s move towards Current
Assets. The first line item here is inventories, which is the closing stock of finished goods,
raw materials and work in progress.

The other item is Trade receivables.

It includes the balance of all sales revenue on credit, net of any allowances for doubtful
accounts. As investors, we need to carefully check the inventory days and debtor days and
compare them within the industry.

The last item on the assets side is cash and cash equivalents; it includes cash in hand, bank
balances, and deposits with maturities less than 3 months. A high balance in the current
account or cash in hand for a long period of time might be suspicious. ( Hint: Satyam Scam )

With these, let’s move on to other parts of the balance sheet, i.e., Equity and Liabilities. As
we discussed above, Assets = Equity + Liabilities.

What is Equity?
Equity consists of two components:
Equity Share Capital
Other Equity
Equity is also known as the net worth of the company.

Equity Share Capital

It is the amount raised by the company at its face value. This is the value of funds that
shareholders have invested in the company.
Share Capital = No. of Shares x Face Value
For example, you started a new company called XYZ Ltd. today with an investment of ₹1
lakh and the company issued 10,000 shares with face value of ₹10 each. In such a case my
share capital will be ₹1 lakh.
After 5 years, the company launched its IPO and issued 1 lakh shares at a share price of ₹500.
Here, my face value will be ₹10 and the securities premium (part of other equity) will be
₹490. Share capital will increase by ₹10 lakhs (1 lakh shares x ₹10), and ₹490 lakhs will be in
other equity

Note that the share capital of a company doesn’t change on the basis of market price of share.
It is always calculated on the basis of FV.
We like the companies where equity dilution is less. Equity dilution means raising money by
issuing equity shares via QIP, Rights, and ESOP.
However, in some industries like banking and finance, since these are leveraged entities, their
share capital will keep increasing over a period of time due to dilution.
As for banks and financials: Equity = Growth Capital + Safety Capital to abide by the
regulatory norms!
The next component is Other Equity, it consists of the following:
Retained Earnings
General Reserve
Securities Premium
Retained earnings are the accumulated profits of the company since inception. Basically, net
profit or loss in P&L will be transferred to retained earnings.

The next item here is the General Reserve.

It is a reserve created by the company for safety purposes such as, any loss due to
contingencies like fire or any other loss.

Securities Premium
It is the amount received by the company on issue of shares at a price above face value.
As discussed in the above example of share capital where we issue shares at 500, in that case
my securities premium will be 490 per share.
In reserves, investors need to be careful if there is any event like writing off the provisions
directly from reserves rather than P&L account.
Yes Bank in Q4 FY2022 created a provision of ₹630 cr. in a few borrowers accounts.
Normally all these provisions should be charged to P&L so that Net Profit can show the
correct picture, but here they charged only ₹150 cr. in P&L and remaining they directly
reduced from reserves.
This is an example of aggressive accounting.
We have seen the same in one pharma company as well where they didn’t charge the foreign
currency losses in P&L, rather they deducted it from reserves.
Investors should be very careful in such companies where they are artificially inflating the
profits of the company.
Another component of the balance sheet is liabilities. In simple words, liabilities are the dues
of the company.

These are also classified in two parts:

Noncurrent liabilities: are dues which are payable after 12 months.
Current liabilities: are dues payable within 12 months.
The first line item in non-current liabilities is long term borrowing, these are loans and other
financial obligations which are payable to banks or other institutions.

There are two types of borrowings:

1. Secured: these loans are against some asset pledged to the bank.
2. Unsecured: these are loans which don’t require collateral; these are generally from related
parties like loans from directors.

The next line item is Lease Liabilities.

It is one of the most important areas that many investors miss while analysing companies.
Lease liability is a new concept from FY2020 with the adoption of new Accounting Standard
Ind AS 116: Leases. Previously the lease rentals which we pay are directly charged to P&L
accounts & there was no requirement of creating lease liability and Right of Use Asset (ROU
Asset).
However, with the introduction of Ind AS 116 all leases are to be recognized in the balance
sheet as an asset and a liability. Lease liability is measured at the present value of lease
payments to be made over lease term.
On the lease liability, we will charge interest which will be reflected in P&L. With liability,
we will also create an asset called ROU Asset and it will depreciate over a period of the lease
term.
Lease = Long term debt = Liabilities
ROU = Assets
Thus, it balances!!

Net impact of the above change

Profit & Loss Statement - Increase in EBITDA (no lease rentals) but consequent decrease in
initial years in net profit (higher depreciation and interest cost).
Balance Sheet - Increase in Assets and Liabilities.
Let’s understand the impact of this new standard on the books of Jubilant Foodworks, as they
have many stores on leases and this industry along with aviation, real estate, hotel and retail
is highly impacted.
They have shown P&L as per the Ind AS 116 adjustments

Their rent expenses have been reduced drastically from ₹385 cr. to ₹84 cr. and depreciation
and finance cost has increased due to depending on ROU assets and interest on lease liability.

The next item we will discuss is Provisions.

These are the amount the company has provided for future obligations like gratuity payable to
employees or leave encashment for employees, warranty claims that can arise in the future.
These are also bifurcated between current & non-current.

Deferred Tax Liabilities/ Assets:

We first have to understand the need for deferred tax. As we know companies prepare a book
of accounts as per Companies Act whereas they need to pay tax as per Income Tax Act, in
both these acts there are some differences which lead to DTA or DTL.

Suppose a company purchased an asset of ₹1 lakh as per Company Act, they can charge dep
@ 20% so dep in books will be 20k. However, as per IT Act they can charge dep only @
15% so dep will be 15k only which leads to a difference of 5k. Now assuming the tax rate is
30% so there will be a DTA of 1500.
The opposite of this creates the Deferred Tax liabilities!
At the end of the day, taxes are always paid as per the Income Tax Act. :)
The last line item in the Balance Sheet is Trade Payables which are the amount payable to
suppliers. For example, if we purchased any raw material on credit then it will be shown here.
Here companies are required to show trade payables in two parts:
Dues to MSME
Dues to others