Balance Sheet
MANAC I
Session 2
Balance Sheet Items’ Classification
Lists assets, liabilities and capital separately
Usually grouped into sub-groups and listed in the
order of their liquidity or length of time required for
conversion into cash
Listed in the ascending or descending order of
liquidity
Prepared at the end of a specified period, usually, a
year; referred to as ‘accounting period’, ‘fiscal year’,
or ‘financial year’
Let us look at a typical Balance Sheet … (next slide)
Ramsons Limited
Balance Sheet as at 31 December 2006 (all figures are in Rs. ‘000)
Assets Rs. Liabilities & Shareholders’ Equity Rs.
Current Assets Current Liabilities
Cash 500 Notes payable 600
Marketable Securities 200 Accounts payable 1,000
Notes/Bills receivable 300 Accrued Liabilities 800
Accounts receivable 1,000 Income Tax payable 400
Less: estimated loss on collection 100 900 Bank overdraft 200
Prepaid expenses 500 Current Liabilities Total 3,000
Merchandise inventory 1,100 Long term Liabilities
Current Assets Total 3,500 Debentures 1,000
Fixed Assets Long term loans 2,000
Land 2,000 Long term Liabilities 3,000
Buildings, plant and machinery: 3,000 Shareholder’s Equity
Less: Accumulated depreciation 1,000 2,000 Ordinary share capital 2,000
Property Plant and Equipment 4,000 Capital Reserves 500
Intangible Assets Reserves & Surplus 1,500
Goodwill 1,500 Share holders equity 4,000
Deferred Expenditure 1,000
Intangible Assets 2,500
3
Total Assets 10,000 Total Liabilities & Shareholders’ Equity 10,000
Classification of Assets
Based on purpose in business:
Current Assets – Held for final transformation in to cash
at the earliest opportunity during the normal course of
business. Example: Inventory
Long Term/Fixed Assets – Held for use in the business.
Sold only on liquidation. Example: Shop Premises
Can same asset be classified in both categories!!
Assets may also be classified as tangible or
intangible
Current Assets
Current literally means a flow
Assets which will normally be converted into
cash with in a fiscal year or within an
‘operating cycle’
The operating cycle is the duration of time taken
by a unit of cash to circulate through the
business operations and return back as cash
Operating Cycle Concept
Work in Further processing,
packaging, storage Finished
Progress Goods
in warehouse
Inventory Inventory
Processing
is done CASH Sold on
credit
Raw
Material
Inventory Accounts
Receivable
Current Assets
Cash
Includes cheques or any other instrument that
circulates as cash
Marketable Securities
Result of excess short-term cash; Valued at ‘lower
of cost or market price’
Accounts Receivable
Amounts owed to the company by ‘debtors’;
collection losses are called bad debts
Accounts Receivable 750,000
Less: Estimated collection loss (Reserve) 75,000
Net realizable value of accounts receivable 675,000
Current Assets…
Notes or Bills Receivable
Arises out of credit sales. Often converted into
negotiable instruments such as a ‘Bill of Exchange’
Negotiable instruments are written ‘promises to pay’ or
‘acceptance of an order to pay’. Are transferable upon
endorsement
Promissory Notes
Current Assets
Prepaid Expenses
Paid in advance such as rent, taxes, subscriptions and
insurance
Merchandise Inventory
Merchandise goods held for sale to customers in the
ordinary course of business
Manufacturing Inventory
Transformed into another product or assembled together
into another product before being sold
Classified as raw material (steel for a car-making unit)
and components (tyres)
Fixed Assets
Are tangible, relatively long-lived items
owned by the business
To be used in the course of business
Not possible to trace them in the value of the
goods or services sold by the firm
Benefit over several accounting periods to
the extent of life of asset
Value of the asset is reduced proportionate to
the expired life of the asset – depreciation
Example…
A trader buys a delivery van for Rs. 100,000. Assume
that the van will have to be discarded as junk as the
end of five years. At the end of the first year it will be
represented as:
Fixed Assets: Rs.
Delivery Van - at cost 100,000
Less: Depreciation to date 20,000
Net 80,000
Example continued…
At the end of five years the valuation of the asset will
be zero
The value of the fixed assets at cost is usually
referred to as ‘Gross Fixed Assets’ or ‘Gross Block’
The amount of depreciation to date (cumulative) as
‘Accumulated Depreciation’
Net value of the fixed asset is usually referred to as
‘Net Fixed Assets’ or ‘Net Block’.
Cost-Depreciation Relationship
100,000
80,000
60,000
40,000 Cost
Acc. Depreceiation
20,000
0
Year Year Year Year Year Year
0 1 2 3 4 5
Note: Depreciation is charged at the end of each accounting period
Depreciation
Fixed assets are valued on the basis of cost of
making the asset available and ‘ready for use’
Others costs (such as installation costs) included
are known as ‘capitalized expenses’ and included
as part of gross fixed asset
Land is not depreciated
Exception: Quarry or any similar extractive
property involving depletion on usage
Intangible and Other Assets
A non-physical resource or a legal right that
represents an advantage to a company's position in
the marketplace.
Example – ‘goodwill’. It reflects the ability of a firm
to earn profits in excess of normal return
Process of expiration of the cost of intangible asset
(like patents) is called ‘amortization’
“Other Assets” are assets which are not normally
classified as current, fixed and intangible
Investments
A ‘financial security’ is a piece of paper that proves
ownership of equity, loan, and other similar
investments
Usually carried at cost price
Investments
Current Long-term
Investments Investments
Readily Realizable Intention is to hold for
more than a year
Deferred Tax Asset
Sometimes business entities prepay their tax and
adjust it in later years (like ‘prepaid expenses’)
Deferred expenditure
Special case of intangible assets
Benefit of these expenses are expected over
several future periods and these expenses are
deferred over a period of time; considered as
expenses in the normal course of business
Example: Restructuring expenses
Questions
on Assets side of Balance Sheet
or Benefits
Current Liabilities
Liabilities that are due within an accounting period
or the operating cycle of the business
Accounts Payable
Arises in the normal course of business as a
result of acquisition of goods or services on
credit
Acceptance
‘Bills of exchange’ accepted by the firm usually
for goods purchased
Current Liabilities
Promissory Notes Payable
Written promises to pay the debt at a specified
future date
Accrued Liabilities
Expenses or obligations incurred in the previous
accounting period but the payment would be
made in the next period. Examples: Salaries due
but not paid
Current Liabilities
Estimated Liabilities or Provisions
Liabilities are known but the amounts cannot be
precisely determined
The principle of conservatism
Example: Income taxes payable
Bank Overdraft
Short-term borrowing – ‘current account’ with
the bank with a contract to permit overdrawing
these accounts up to a limit
Flexible borrowing
Liabilities …
Contingent Liabilities
These are no liabilities as of now as neither ‘the
amount’ nor ‘the liability’ is certain
They become liabilities only on the happening
of a certain event
Example: A claim against the company
contested in a law court
Shown as part of ‘notes’ to the balance sheet
Long-Term Liabilities
Are usually for more than one year
Cover almost all the liabilities not included in the
current liabilities and provisions
Long Term Liabilities
Secured Unsecured
(Asset Backing) (No asset backing)
Long-Term Liabilities
Debentures and Bonds
Special instruments of borrowing used by
registered companies under the State
Companies Act
Designated into standard units and one or more
of those units are issued to lenders
Have standard form and legal backing
Owners Equity
Capital
Assets = Liabilities + Owners Equity
In the Ramsons Illustration:
Total assets 10,000,000
Liabilities 6,000,000
Owners equity 4,000,000
Owners Equity = Contributed Capital + Retained
Earnings
Share Premium paid by stockholders is an example of
capital reserve
Illustration
A Company has an authorized share capital of Rs. 200,000;
divided into 15000 ordinary shares of Rs. 10 each and 500,
10% preference shares of Rs. 100 each
The portion of the authorized capital, which is raised, is referred
to as ‘issued capital’. If the Company offered to the public 7500
ordinary shares and 500 preference shares for cash.
Issued capital Rs.
7500 ordinary shares of Rs. 10 each 75,000
500, 10% cumulative preference shares of Rs. 100 each 50,000
Total 125,000
Continued…
Subscribed, Called up and Paid up Capital
7500 ordinary shares of Rs.10 each 75,000
500, 10% cumulative preference shares of Rs.100 each 50,000
Total 125,000
The company needed only part of the capital and
hence chose to issue only one half of the total
authorized ordinary shares
The implication of authorized capital is that it is
maximum amount of capital a company may raise
without altering the deed of registration
Preference Shares
Have some preference over ordinary shares
In case of liquidation the assets remaining after
payments to creditors are distributed to
preference shareholders first
Are first paid their ‘prefixed’ dividend
Usually redeemable after a specified period
Ordinary Shares
Have residual claim against all the assets
No preferential or fixed rights in either repayment
of capital or profit distribution
Reserve and Surplus
These are surpluses earned by the firm (not
distributed as dividends)
Retained earnings normally arise out of profitable
operations
They are ‘earned capital’ for the firm
Limit of dividend is retained earnings
Questions
on Liabilities and Owners Equity
side of Balance Sheet
or Sacrifices
ASSETS LIABILITIES & OWNERS EQUITY
Fixed Assets Owners Equity
Share Capital
Investments Reserves and Surplus
Current Assets Liabilities
Miscellaneous Current Liabilities
TOTAL TOTAL
Prepare a Balance Sheet as of 30 March 2010, for
the SK Company, using the following information
Cash 89000 Capital 1000000
Accounts Payables 241000 Premises 1120000
Machinery 761000 Bonds payable 700000
Estimated tax liability 125000 Accumulated depreciation 386000
on machinery
Inventories 513000 Accumulated depreciation 538000
on Premises
Investments 320000 Accrued Expenses 107000
Land (cost) 230000 Accounts receivables 505000
Marketable securities 379000 Retained Earnings
?
Bills Payable 200000
What is the Answer ?
WHAT - Balance Sheet total
Assets = Liabilities + Owners Equity
WHAT - Retained Earnings
