Presentation - Balance Sheet

R.
CHENCHIAH
ASST. GENERAL MANAGER
CENTRAL STAFF COLLEGE
KOLKATA
WHAT IS A BALANCE SHEET?
It is a statement of assets and liabilities of a

person or entity as on a particular date. By
convention Liabilities are listed on the left
side and Assets on the right.
Let us suppose that Mr.Mukherjee has some money with him say Rs.100000
and he wants to start a small shop by the name “Mukherjee Stores” to deal
in provisions. To Mr.Mukherjee Rs.100000 is an asset but to the concern it is
in effect a borrowing from Mr.Mukherjee. We call this the capital of the
concern. Since it is also a borrowing and has to be paid back to
“Mr.Mukherjee” when the concern is wound up this is a liability to the
company. The amount is deposited into the bank account of the company. In
accordance with the principles of double entry system of book keeping the
corresponding entry on the assets side will be “Cash in hand and at Bank”.
Balance sheet at the end of the day will appear as follows :
Balance Sheet of Mukherjee Stores as on 01.01.2011
LIABILITIES ASSETS
Particulars Amt Particulars Amt
Capital 100000 Cash in hand & at Bank 100000
Total 100000 Total 100000

On 03.01.2011 Mukherjee Stores purchases some furniture like counters and
chairs and a computer to carry out its business. The total cost of these items
is Rs.10,000. Cash is paid for purchase of these. Hence the bank balance
comes down to Rs.90,000. On the other hand the items purchased have to
be accounted in the books of the concern. The items purchased i.e.
computer and counter are in effect assets of the company. All that has
happened is one form of asset (Cash) has been changed into another form
(Furniture & fixture). This is given effect to by reducing cash on hand and
introducing a new head called Furniture & Fixtures as shown below:
LIABILITIES ASSETS
Furniture and Fixtures 10000
On 10.01.2011 Mukherjee Stores purchases some items for trading. It
purchases five bags of rice, four bags of wheat, two bags of sugar one carton
of oil and various other misc items and pays through cash. The total cost of
these items comes to Rs.5000. This is paid by cheque. Hence cash in hand &
at bank will get reduced by Rs.5000. All the items purchased can be
collectively termed as stock-in–trade or simply stock. Since this is an asset, it
is shown on the assets side of the Balance sheet. In effect cash in hand &
Bank is reduced by Rs. 5000 and a new item called Stock is added. At the end
of the day the balance sheet will appear as follows :
LIABILITIES ASSETS
Stock 5000
On 15.01.2011 Mukherjee Stores sells some items of stock for Rs.1000 on cash and
some items for Rs.2000 on credit. In the first case Stock will get reduced by Rs.1000
and cash in hand will go up by Rs. 1000. In the second case the stock will get
reduced by Rs. 2000 and a new entry on the assets side called Debtors (or
Receivables) will be introduced. In effect one head of assets (Stock) is partly
substituted by another head of assets (Receivables). The Balance Sheet at the end
of the day will appears as follows:
LIABILITIES ASSETS

Capital 100000 Cash in hand & 86000
at Bank
Stock 2000
Receivables 2000
On 25.01.2011 Mukherjee Stores replenishes its stock by purchasing goods worth
Rs.6000. In view of the good reputation in the market it is able to pay Rs.2000 cash
for the goods and obtains credit for the remaining amount of Rs.4000. While stock
gets increased by Rs.6000, cash in hand gets reduced by Rs. 2000. Further, a new
entry called Sundry Creditors is added on the liabilities side and the amount of credit
(Rs.4000) availed from the market is shown against this. Since it is a liability it means
that the company owes this amount . At the end of the day the Balance Sheet
appears as follows :
LIABILITIES ASSETS
Creditors 4000 Furniture and Fixtures 10000

Stock 8000
Receivables 2000
Considering the business potential the concern approaches UCO Bank for a term
loan of Rs.30000 for purchasing the premises in which it is conducting business and
which has now come up for sale at a cost of Rs.40000. The bank agrees to loan
Rs.30000 with a condition that the balance amount of Rs.10000 (Margin) should be
borne by the concern from its own funds. The loan is to be repaid in 8 half yearly
installments. The loan is availed on 31.01.2011. Hence a new entry appears on the
liabilities side called Bank Term Loan and Cash in hand gets reduced by Rs.10000
(Margin). At the end of the day the Balance Sheet appears as follows :
LIABILITIES ASSETS
Capital 100000 Fixed assets (Shop) 40000

Bank Term Loan 30000 Furniture and Fixtures 10000
Creditors 4000 Stock 8000
Receivables 2000
Cash in hand & at Bank 74000

The company also requests the bank for working facilities of Rs.22500
which is sanctioned after due appraisal. The company utilizes the
funds on 01.02.2011 to purchase further stock for Rs.30000. As a
result stock goes up by Rs.30000, Cash in hand and bank reduces by
Rs.7500 (Margin) and a new entry on the liabilities side called Bank
Cash Credit appears. At the end of the day the Balance Sheet appears
as follows :
LIABILITIES ASSETS
Bank cash credit (WC) 22500 Receivables 2000

A series of transactions take place over the next two months as a
result of which the balance sheet undergoes changes in tune with the
transactions. Creditors are repaid and fresh credit obtained. Similarly
receivables also changes with repayment and fresh credit sales taking
place. It must be remembered that stock purchased is sold at a profit.
The Balance sheet appears as follows on 30.03.2011
LIABILITIES ASSETS


The balance sheet which has now been drawn up is
that of a sole proprietorship.
LIABILITIES ASSETS

In case it had been a partnership account (Partners A and B sharing the
capital in the ratio of 4: 6) the Balance sheet would still have been the
same except for some small changes in the capital structure where it
would have appeared as follows :
LIABILITIES ASSETS
Partners Capital : 100000 Fixed assets (Shop) 40000

A : 40000
B : 60000

In case the concern is a public limited company the capital would have been
contributed by a number of people in the form of shares. The entire capital is
divided into equity shares of smaller denomination. It must be remembered that
the authorized capital is the total amount up to which capital can be raised. The
company may or may not issue shares to the total extent to which it is authorized.
The company may raise capital as and when it needs within the authorized capital.
Balance Sheet of Mukherjee Ltd as on 30.03.2011
LIABILITIES ASSETS
Authorized share capital : Fixed assets (Shop) 40000

15000 equity shares of Rs.10 each :
1,50,000
Paid up share capital :
1,00,000 100000

If we consider closely it will be seen that the entire liabilities is a source of funds and the
entire assets represents the uses of funds. Some of the sources of funds (liabilities) are
repayable within 12 months (Current Liabilities) and some of the assets can be converted
into cash within 12 months. We can also notice that some of the sources of funds have
to be repaid only after 12 months. These are called long term sources. Similarly some of
the funds have been put to long term uses . Hence we may classify them as under :
LIABILITIES ASSETS
Long Term Sources: Long Term Uses :
Authorized share capital : 100000 Fixed assets (Shop) 40000
1,50,000
1,00,000

Current Liabilites : Current Assets :
NET WORKING CAPITAL
Net Working Capital (NWC) is :
1. Long term source – Long term use
2. Short term use – Short term source
(or in other words)
Current Assets – Current Liabilities
It should always be remembered that the entire long term sources should not be
used for long term uses. A part of it should be used for short term uses. Another
cardinal principle is that short term uses should never be used for long term uses. It
may be seen that long term sources minus long term uses is equivalent to the short
term assets (current assets) minus short term liabilities (current liabilites). This
difference is called Net Working Capital (NWC)
LIABILITIES ASSETS
15000 equity shares of Rs.10 each : 1,50,000

Current Liabilites (Short Term Sources): Current Assets :

NET WORTH & TANGIBLE NET WORTH
Net Worth is the total of the capital and

reserves of the company.
Tangible net worth TNW is the net worth of

the company less the intangible assets of the
company.
In the balance sheet given below we have “equity” & “reserves and surplus” the
total of which will give us the Net Worth of the company.
(Rs.100000+Rs.20000=Rs.120000). We also have two intangible assets namely
“Royalty” and “Preliminary expenses”. These are not tangible assets and are
reduced from the net worth to arrive at the “Tangible Net Worth”(Rs.120000-
Rs.10000-Rs.5000 =Rs.105000).
LIABILITIES ASSETS
Authorized share capital : 100000 Land & Building 40000
Reserves and Surplus 20000 Furniture and Fixtures 10000
Bank Term Loan 30000 Stock 20000
Creditors 6000 Receivables 17000
Bank cash credit (WC) 22500 Cash in hand & at Bank 76500
Royalty 10000
Preliminary expenses 5000

DEPRECIATION
Depreciation means fall in the value or quality of an asset due to use or
passage of time. Companies make provision for the reduction in value of the
fixed asset. There are two methods of calculation of depreciation namely
1. Straight line method
2. Written down value method.
Straight line method : In this method a fixed percentage on original

cost of the asset is deducted year after year as depreciation.
Written down value method : In this method a fixed percentage on

the diminishing balance is provided for as depreciation.
Whenever there is a change in the method of depreciation the analyst

should exercise utmost caution.
In the balance sheet given below the company
has provided for depreciation in respect of
fixed assets.
LIABILITIES ASSETS
Authorized share capital : 100000 Land & Building : 40000
15000 equity shares of Rs.10 each : 1,50,000 Furniture and Fixtures : 10000
Less: Depreciation : 1000
49000 49000
Reserves and Surplus 20000

Bank Term Loan 30000 Stock 20000
Creditors 6000 Receivables 18000
Bank cash credit (WC) 22500 Cash in hand & at Bank 76500
Royalty 10000
Preliminary expenses 5000

Current assets / Current Liabilities gives us a ratio called Current Ratio.
It is a measure of the liquidity of the company. From the bankers point
of view a current ratio of 1.33 : 1 is considered as good. A current ratio
of less than 1:1 means that the company is facing a cash crunch and
will not be able to meet its short term commitments.
LIABILITIES ASSETS

Current Liabilites : Current Assets :
COMPONENTS OF BALANCE
SHEET
Proprietor’s capital or paid-up share

capital
These are the funds which the promoters
of the business or the share holders bring
in.
The capital of a company could be an
authorized capital, issued capital,
subscribed capital and paid up capital.
CAPITAL
Authorised capital is the extent upto which
capital can be raised.
Issued capital is the amount upto which
capital is intended to be raised and has been
offered to the public
Subscribed capital is the extent upto which
the issued capital has been subscribed.
Paid up capital is the extent upto which
capital has been actually called and received.
Reserves
Reserves can be of the following kinds:
1.Share premium reserve
2.Revaluation reserve
3.Investment allowance reserve
4.Depreciation reserve
5.Share / Debenture redemption reserve
6.Capital subsidy reserve
7.General reserve
Reserves
Share Premium Reserve: Many times companies are

able to raise capital at a premium. Say, a share with
a face value of Rs.10 may fetch the company Rs.25
at the time of issue depending on the financial
strength of the company. The difference between
the actual price and the face value is called the
share premium (Rs.25-Rs.10=Rs.15). The difference
amount is kept in share premium amount and is
available to the company. The company however
will pay dividend only on the face value.
Reserves
Revaluation reserve : Business entities
sometimes go in for revaluation of its assets
to reflect their present value. After
revaluation the value of the asset is
increased and the increase in value is shown
as revaluation reserve on the liabilities side.
Revaluation does not in any way improve the
financial viability of the concern and as such
bankers do not consider the amount as part
of Net Worth.
Reserves
Investment allowance reserve : Tax

incentives are sometimes granted by the
government by allowing industrial units to
create reserves as an allowable transfer from
taxable profits. These amounts are required
to be utilized within a specified time frame
(say 10 years) for acquisition of new fixed
assets.
Reserves
Depreciation reserve : Normally the depreciation
arrived at is deducted from the value of fixed asset
(gross block). The resultant value is called net block
and is shown on the assets side of the balance
sheet. Sometimes the company creates a reserve
called depreciation reserve and credits the
depreciation amount to this reserve. In that case
the value of the fixed asset is shown at the original
price. In such cases the banker should set off the
depreciation value against the fixed assets and
arrive at the net figure. Care should be taken to
ensure that depreciation reserve is not treated as
part of net worth.
Reserves
Share / Debenture redemption reserve: The
management makes reserves for payment of
debenture or redeemable preference shares. This
is also known as a sinking fund. The balance left
out of sinking fund can be treated as free reserves.
Capital subsidy reserve : To develop certain areas,

the government provides incentives by way of
subsidies. Such subsidy is not returnable and forms
part of the owned funds of the company. The
subsidy is credited to capital subsidy reserve.
Reserves
General Reserve : Certain amount of profits is
transferred to reserve before payment of the
dividend to the shareholders. This is credited
to the general reserve. Further the balance
of profit which is retained in the business is
also credited to this reserve. The free
reserves can be capitalized by making partly
paid up shares as fully paid up or by issuing
bonus shares subject to certain conditions.
LONG TERM LIABILITIES
Long term liabilities can be broadly classified
as follows :
1. Debentures
2. Fixed deposits
3. Loans from friends / relatives / associate
companies
4. Terms loans from banks / financial
institutions.
SHORT TERM LIABILITIES
Short term or current liabilities can be classified as follows :
1.Cash credit/ bills purchased & discounted
2.Short term loans / commercial paper
3.Deposits maturing within one year
4.Sundry creditors
5.Interest charges
6.Term loan installments/deferred payment
credits/debentures/redeemable preference shares –
payable within one year.
7.Provision for taxation, PF etc.
8.Dividends, gratuity and other provisions.
FIXED ASSETS
The following constitute fixed assets of a
company :
1.Land
2.Building
3.Machinery, Tools and equipment.
4.Vehicles
5.Furnitue and fixtures
6.Capital work in progress
CURRENT ASSETS
The following constitute current assets :
1. Cash and bank balances
2. Short term investments and fixed deposits
3. Receivables (Book debts)
4. Installment of deferred receivables due within
one year.
5. Inventory (Raw materials / WIP / FG)
6. Prepaid expenses
7. Advances
8. Any other receivables due within the next six
months.
NON CURRENT ASSETS
Non current assets consist of the following :
1. Long term investments.
2. Investment in non-marketable securities.
3. Prepaid expenses of long term nature.
4. Loans and advances of long term nature.
INTANGIBLE ASSETS
Intangible assets consist of the following :
1. Goodwill
2. Patents
3. Copyrights
4. Trademarks
5. Preliminary and formation expenses and
preoperative expenses (amt. not written off)
6. Loss
CONTINGENT LIABILITIES
Contingent liabilities are off-balance sheet items. They are
called contingent because of the possibility of their becoming
a funded liability depends on certain events. The following
are contingent liabilities :
1.Pending law suits
2.Claims not recognized as debt.
3.Letters of Credit issued on behalf of the organisation.
4.Taxes and duties under dispute.
5.Guarantees given on behalf of others.
6.Bills and cheques discounted by banks.
FORMAT OF PROFIT & LOSS A/C
To: Opening stock By Sales
Raw Material Purchased Less: Returns
Stores and spares Income from services
Power and fuel By income from various other heads
Rent By Closing stock
Repairs to building By Income from investments
Repairs to machinery By Profit on sale of investments
Others repairs By Misc Income
Salaries and wages By Dividend income
Bonus By profit on trns. not usually undertaken
Staff welfare expenses By Loss tfrd to P&L appropriation a/c
Pension & gratuity
Auditor’s fees
Insurance
Rates and Taxes
Printing and stationery
Postage, Telegram and Telephone
Commission brokerage and discounts
Interest & Bank charges
Loss on sale of investments
Depreciation
Net Profit tfrd to P&L account
Total Total
THANK YOU

Presentation - Balance Sheet

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Presentation - Balance Sheet

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R.

It is a statement of assets and liabilities of a

Total 100000 Total 100000

Balance Sheet of Mukherjee Stores as on 15.01.2011

Particulars Amt Particulars Amt

Particulars Amt Particulars Amt

Capital 100000 Cash in hand & at Bank 84000

Creditors 4000 Furniture and Fixtures 10000

Particulars Amt Particulars Amt

Capital 100000 Fixed assets (Shop) 40000

Total 134000 Total 134000

Particulars Amt Particulars Amt

Capital 100000 Fixed assets (Shop) 40000

Bank Term Loan 30000 Furniture and Fixtures 10000

Creditors 4000 Stock 38000

Bank cash credit (WC) 22500 Receivables 2000

Cash in hand & at Bank 66500

Total 156500 Total 156500

Particulars Amt Particulars Amt

Capital 100000 Fixed assets (Shop) 40000

Total 158500 Total 158500

Balance Sheet of Mukherjee Stores as on 30.03.2011

Particulars Amt Particulars Amt

Capital 100000 Fixed assets (Shop) 40000

Bank Term Loan 30000 Furniture and Fixtures 10000

Creditors 6000 Stock 20000

Bank cash credit (WC) 22500 Receivables 12000

Cash in hand & at Bank 76500

Total 158500 Total 158500

Particulars Amt Particulars Amt

Partners Capital : 100000 Fixed assets (Shop) 40000

Bank Term Loan 30000 Furniture and Fixtures 10000

Creditors 6000 Stock 20000

Bank cash credit (WC) 22500 Receivables 12000

Cash in hand & at Bank 76500

Total 158500 Total 158500

Particulars Amt Particulars Amt

Authorized share capital : Fixed assets (Shop) 40000

Creditors 6000 Stock 20000

Bank cash credit (WC) 22500 Receivables 12000

Cash in hand & at Bank 76500

Total 158500 Total 158500

Bank Term Loan 30000 Furniture and Fixtures 10000

Bank Term Loan 30000 Furniture and Fixtures 10000

Creditors 6000 Stock 20000

Net Worth is the total of the capital and

Tangible net worth TNW is the net worth of

Reserves and Surplus 20000 Furniture and Fixtures 10000

Bank Term Loan 30000 Stock 20000

Creditors 6000 Receivables 17000

Preliminary expenses 5000

Total 178500 Total 178500

Straight line method : In this method a fixed percentage on original

Written down value method : In this method a fixed percentage on

Whenever there is a change in the method of depreciation the analyst

Reserves and Surplus 20000

Preliminary expenses 5000

Total 178500 Total 178500

Bank Term Loan 30000 Furniture and Fixtures 10000

Proprietor’s capital or paid-up share

Share Premium Reserve: Many times companies are

Investment allowance reserve : Tax

Capital subsidy reserve : To develop certain areas,

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