What is a Balance Sheet?Balance Sheet is one of the reports of a financial statement which provides the financial condition on a given date. An entity’s balance sheet provides a lot of information which can be used to analyse the financial stability and business performance. The balance sheet is a report version of the accounting equation that is balance sheet equation where the total of assets always is equal to the total of liabilities plus shareholder’s capital.
Assets = Liability + Capital
Investors and creditors generally look at the balance sheet and infer as to how efficiently an entity can use its resources and assess the value of their investments. The three important sections of any balance sheet are:
- Assets – This is a resource owned by an entity to produce positive economic value.
- Liabilities – This provides a list of debts an entity owes to others.
- Capital or Equity- This is the amount invested by the shareholders
Importance of Balance SheetBalance sheet analysis can reveal a lot of important information about a company’s performance. Importance of balance sheet is listed below:
- It is an important tool used by outsiders such as investors, creditors, and other stakeholders to understand the financial health of an entity.
- It is a tool to measure the growth of an entity. This can be done by comparing the balance sheet of different years.
- It is an essential document that must be submitted to the bank or investors to obtain a business loan.
- It helps stakeholders to understand the business performance and liquidity position of the entity.
- It enables decision making regarding expansion projects and meet unforeseen expenses.
- If the entity is funding its operations with profit or debt, it can be known by analysing the balance sheet.
Sample Format of Balance SheetThere are several balance sheet formats available and generally, it is categorized as classified, common size, comparative, and vertical balance sheets. The old format of balance sheet called as T-shaped or horizontal format as given below: The new format of the balance sheet is also called “vertical format balance sheet” and it lists the equities and liabilities on the top followed by the assets at the bottom.
MCA Compliance RequirementAs per the amendment in 2017 to the Companies Act 2013, every company should prepare the profit and loss account and balance sheet as per the format prescribed in new Schedule III. Refer the following link for details on the same: http://www.mca.gov.in/SearchableActs/Schedule3.htm
Detailed note on Sections and Sub-Sections
|Current Asset||Cash||Current assets are those which can be liquidated within a short period of time. Cash is the most liquid form of these assets and it includes all funds contained in current, savings, and money market accounts.|
|Accounts Receivable||Accounts receivable is the amount to be received from the customers also known as debtors. These receivables are created from the time the customer is billed to the time the company receives payment from the customer|
|Inventory||Inventory is the items that a company purchases/manufactures and then sells to the customers. From the time the goods/raw material are purchased or processed to the time it is sold to the customer, these are termed as inventories.|
|Fixed Asset||Equipments||Fixed assets are items that are physical assets that are owned by the company for a long term. Long term assets are generally depreciated over time and so these assets are recorded with a total accumulated depreciation amount subtracted from them.|
|Vehicle||Vehicle is a long term asset held by the company for more than a year and it is depreciated over time.|
|Land||Land is a fixed asset and held for a longer period of time than any other long term asset. This is one of the fixed assets which is not depreciated instead the value of the land increases as the years pass.|
|Intangible Asset||Goodwill||Goodwill is an intangible asset which represents non-physical assets that add to a company’s value but is not tangible.|
|Current Liability||Accounts Payable||These are the obligations that will become due in the current period (within a year) and generally includes trade due to vendors and suppliers. Accounts payable are amounts due to creditors for services or goods that have not yet been paid|
|Accrued Expenses||Accrued expenses are obligations that are recognized in the books but are not yet due, and include wages, interest etc|
|Taxes Payable||This represents the amount of taxes that a company owes to the government. All taxes are generally due to be paid within a year and hence classified as current liability|
|Long Term Liability||Long Term Debt||Long-term debts are those obligations which will not be payable within the current year and will become due in more than one year. It represents the total amount due to be paid by the company to third parties and creditors for over a year or more|
|Share Holder’s Equity||Capital Stock||Capital represents the money invested by the owner in the entity and it is the total assets minus the total liabilities. Capital stock changes according to the entity type – companies report capital as common stock, preferred stock etc whereas Partnerships list the same Partner’s capital.|
|Retained Earning||This is the excess earnings retained by the entity to invest in the business. This represents the amount not distributed to shareholder. It is also termed as ploughing back of profits.|