Concept Note: Finance Domain

Note 1: Definition of 'Balance Sheet'

Definition: Balance Sheet is the financial statement of a company which includes assets,
liabilities, equity capital, total debt, etc. at a point in time. Balance sheet includes assets on
one side, and liabilities on the other. For the balance sheet to reflect the true picture, both
heads (liabilities & assets) should tally
Assets = Liabilities + Equity
Current Assets + Non-current Assets = Current Liabilities + Long-term Liabilities +
Equity

Description: Balance sheet is more like a snapshot of the financial position of a company at
a specified time, usually calculated after every quarter, six months or one year. Balance Sheet
has two main heads –assets and liabilities.

Let’s understand each one of them.

1. What are assets?
Assets are those resources or things which the company owns.
They can be divided into current as well as non-current assets or long term assets.
2. What are liabilities?
Liabilities on are debts or obligations of a company. It is the amount that the
company owes to its creditors.
Liabilities can be divided into current liabilities and long term liabilities.
3. What is shareholder or owner’s equity?
Another important head in the balance sheet is shareholder or owner’s equity. Assets
are equal to total liabilities and owners’ equity.
Owner’s equity is used when the company is a sole proprietorship and shareholders’
equity is used when the company is a corporation.
It is also known as book value of the company.
Example of reporting a transaction in balance sheet format
Let’s understand reporting of a transaction on a balance sheet. If a company XYZ takes a
five-year loan from public sector banks for an amount of Rs 5,00,000, it means that the bank
will pay the money to XYZ Ltd.

The accounts department will increase the cash component by 5,00,000 on the assets front,
and at the same time increase the long term debt account with the same amount, thus
balancing both the sides.

Current Assets + Non-current Assets = Current Liabilities + Long-term Liabilities + Equity

5,00,000 + Non-current Assets = Current Liabilities + 5,00,000 + Equity

Next, if company raises Rs 10,00,000 from investors, then its assets will increase by that
amount, as will its shareholder’s equity.

15,00,000 + Non-current Assets = Current Liabilities + 5,00,000 + 10, 00, 000

How would you record a cash purchase of machinery worth Rs.4, 00, 000? (Hint: Same side
transaction)

Source: Economic Times (Modified version)