Search in Indianmoney's WealthPedia

Home Articles Financial Statements - Balance Sheet

Financial Statements - Balance Sheet Research Team | Posted On Saturday, February 21,2009, 05:30 PM

Financial Statements - Balance Sheet



Financial statements provide an overview of a business' financial condition in both short and long term. All the relevant financial information of a business enterprise, presented in a structured manner and in a form easy to understand, are called the financial statements. These are the final product of accounting work done during the accounting period i.e. quarterly, half yearly or annually. By this the accounting information is communicated to the external users. It includes three basic financial statements namely:

1. Profit and Loss Account
2. Balance Sheet
3. Cash Flow Statements

Although the general principles of preparing the final accounts of joint stock companies are the same as in the case of the sole proprietorship or partnership firms, but in addition to these principles, a joint stock company must confirm to certain legal provisions as given in the Indian Companies Act 1956.

Every company must prepare final accounts every year. At every annual general meeting of a company, the Board of Directors of the company shall lay before the company (a) a Balance Sheet as at the end of period (b) a Profit and Loss Account for that period. In case, a company is not carrying on business for profit, an Income and Expenditure Account shall be laid before the company at its annual general meeting instead Profit and Loss Account. The report of Auditor and Board of Directors should be attached to every Profit and Loss Account and Balance Sheet. Enterprises having a turnover in excess of Rs. 50 crores have to attach Cash Flow Statement and Segment Report with the annual accounts.

A Balance Sheet is a statement of assets and liabilities indication the financial position of an enterprise at a given date.

A Profit and Loss Account shows the net result of business operations during an accounting period.

A Cash Flow Statement shows a company's cash flow activities, namely operating, investing and financing activities.

Schedules have the details of amounts in the Balance Sheet and Profit and Loss Account, while the notes are the statements of accounting polices adopted and explanation of material information.

Application of Schedule VI of the Companies Act:
The form and contents of Balance Sheet and Profit and Loss Account are governed by Section 211 of the Companies Act, 1956.

Section 211 (1):
According to this section every Balance Sheet must give true and fair view of the state of affairs of the company as at the end of the financial year and to be in the form set out in Part I of Schedule VI or as near thereto as circumstances permit or in such form as may be approved by the Central Government.

Section 211 (2):
According to this section every Profit and Loss Account must give true and fair view of the profit or loss of the company for the financial year and shall comply to with the requirement of Part II of Schedule VI, so far they are applicable.

Balance Sheet
In the simplest form, a Balance Sheet may be defined as a statement of company’s assets and liabilities as on a particular date. Thus, we can say a balance sheet is a snapshot of the company's financial position at a single point in time. The assets of the company, fixed assets and current assets, are represented by the liabilities, long-term liabilities and short-term liabilities, and the share holders equity, i.e., paid up share capital and reserves.

How to read a balance sheet
A balance sheet, also known as a "statement of financial position", reveals a company's assets, liabilities and owners' equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company's financial statements. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.

The balance sheet is divided into two parts that, based on the following equation, must equal (or balance out) each other. The main formula behind balance sheets is:
                         Assets = Liabilities + Shareholders' Equity

This means that assets, or the means used to operate the company, are balanced by a company's financial obligations (liabilities) along with the total equity investment brought into the company.

A typical Balance Sheet looks like this:


Condensed Consolidated Balance Sheet
as at 30 June 2008
(Currency: in thousands of Indian Rupees except share data)
June 30,2008
 31 December 2007
Shareholders' funds
Share capital
Share application money
Reserves and surplus
Loan funds
Secured loans
 23, 785
Deferred tax liability, net
Fixed assets
Gross block
Less: Accumulated depreciation
Net block
Capital work-in-progress
Deferred tax asset, net
Current assets, loans and advances
Sundry debtors
Cash and bank balances
Costs and estimated earnings in excess of billings
Loans and advances
Less: Current liabilities and provisions
Current liabilities
Net current assets

Assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets. Any resource which has future benefits associated with it is called an "asset". Owners' equity, referred to as shareholders' equity in a publicly traded company, is the amount of money initially invested into the company plus any retained earnings (earnings retained by the company after paying for dividends), and it represents a source of funding for the business. The main line items on the balance sheet are:

Gross block is the sum total of all assets of the company valued at their cost of acquisition. This is inclusive of the depreciation that is to be charged on each asset.

Net block is the gross block less accumulated depreciation on assets. Net block is actually what the asset are worth to the company. Accumulated depreciation is the reduction of the carrying amount of the assets on the balance sheet to reflect the loss of value due to wear, tear, and usage.

Capital work-in-progress is tangible assets which are under course of construction
and the nature of inestment being long term (capital) in nature is called as capital work in progress. Sometimes at the end of the financial year, there is some construction or installation going on in the company, which is not complete, such installation is recorded in the books as capital work in progress because it is asset for the business.

Investments If the company has made some investments out of its free cash, it is recorded under the head investments.

Current Assets are assets on the balance sheet which is expected to be sold or otherwise used up in the near future, usually within one year, or one business cycle - whichever is longer.

Loans & Advances are made to customers or suppliers or other related parties. This is what others owe to the company.

Inventory is the stock of goods that a company has at any point of time.

Receivables include the debtors of the company, i.e., it includes all those accounts which are to give money back to the company.

Sundry Debtors are miscellenous debtors with small amounts due to the company. Sundry means small. Hence, smaller debtors are "grouped" together in this line item.

Other current assets include all the assets, which can be converted into cash within a very short period of time like cash in bank etc.


Total debt includes the long term and the short debt of the company. Long term is for a longer duration, usually for a period more than 1 year like debentures. Short term debt is for a lesser duration, usually for less than a year like bank finance for working capital.

Secured Loans are loans in which the borrower pledges some assets (e.g. a property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan.

Creditors are those entities to which the company owes money. Sundry creditors are miscellaneous creditors whom the company owes small amounts.

Other liabilities and provisions include all the liabilities that do not fall under any of the above heads and various provisions made.

Stockholders Equity

Equity Share capital is the owner's equity. It is the most permanent source of finance for the company.

Reserves include the free reserves of the company which are built out of the genuine profits of the company. Together they are known as net worth of the company.

Further details on Assets

Fixed assets: 
Relevant information to be given regarding such assets is:
1. As far as possible, different assets should be shown separately.
2. Regarding every fixed asset, it is necessary to show its original cost and additions (purchase) thereto and deductions (sale) there from during the year and the total depreciation written off or provided in it up to the end of the year.

Investments by nature are fixed. Schedule VI of Companies Act, 1956 requires following details to be given with respect to investments:
1. Investments are categorised into:
    a. Investment in Government and trust securities;
    b. Investment in shares, debentures and bonds of various companies;
    c. Investment in shares, debentures and bonds of subsidiary companies; and
    d. Investment in fixed assets.

2. It is necessary to disclose the nature (long term or current) and mode of valuation of every investment.

3. It is necessary to disclose the total amount of company’s quoted and unquoted investments and market value of quoted investments in the Balance Sheet.

Current assets and Loans & Advances:
These are divided into two parts:
1. Current Assets
2. Loans and Advances

Miscellaneous Expenditure:
It includes those items which are not really assets but are recorded in the assets side because it shows debit balance, hence are called fictitious assets. The amount of miscellaneous expenditure which is written off this year is shown on the debit side of Profit and Loss Account and the unwritten off portion is shown in the Balance Sheet under this head.

This includes the followings:
1. Preliminary expenses.
2. Expenses including commission or brokerage on underwriting or subscription of share or debentures.
3. Discount allowed on issue of shares or debentures.
4. Interest paid out of capital during construction.
5. Development expenditure not adjusted.
6. Other sums, specifying the nature.

What is your Credit Score? Get FREE Credit Score in 1 Minute!

Get Start Now!
Get It now!

This is to inform that Suvision Holdings Pvt Ltd ("") do not charge any fees/security deposit/advances towards outsourcing any of its activities. All stake holders are cautioned against any such fraud.