WHAT IS A BALANCE SHEET

A balance sheet is a statement of those assets and liabilities of a business enterprise that can
be given a value in terms of money  
The liabilities indicate what money has been made available to the enterprise, and from where.

The assets show how the enterprise has used the money made available to it.

The balance sheet is one of the financial statements of a company and needs to be supported
by:

a)       the profit and loss account (income statement);

b)       the sources and uses of funds statement (funds flow statement);
c)       notes to the financial statements;
d)       the auditor’s certificate
The things that a business enterprise owns are called its assets.
 
The various sums of money that a business enterprise owes are called its liabilities
 

Assets
Assets include land, buildings, manufacturing equipment, motor vehicles, fixtures and 
fittings and anything else an enterprise owes that can be given a value in terms of money.
  
Now, to acquire its assets, an enterprise must obtain money from various sources; for instance, it
may borrow from loan companies or from banks. It then owes this money.

The various amounts of money owed by an enterprise are called its liabilities

The shareholders of a company generally subscribe, or make money available, for the life of the
Company.

Such money is know as shareholders’ funds, and is subscribed for the life of the company; it will be
repaid to the shareholders only if the company is wound up. Nevertheless, the money is still owes
to the shareholders.
 The money that is subscribed by shareholders is in fact owes to the 
shareholders, and it is therefore part of the company’s (assets/liabilities).
HANDICRAFTS LTD
Balance sheet at 31 December 1988

Liabilities Rs. Assets Rs.

Money subscribed by      6,120.00 Land, buildings, etc.         17,500.00

Shareholders

Long-term loan 14,000.00 Raw materials, etc.           6,920.00

Owed to financial
institution

Bank overdraft 4,300.00

24,420.00 Total assets 24,420.00

Total liabilities
 Types of Assets and Their Liquidity
The assets of a business enterprise are usually listed on a balance sheet in two main groups : fixed and current

Fixed assets are acquired for long-term use in the enterprise, do not vary greatly from day to day, and are only
infrequently converted into cash during the life of the enterprise.

Current assets generally include cash, accounts receivable and inventories that will be converted into cash
during the operating cycle of the business; they are likely to vary continually.

There is also a third group of assets classified as “investments” which appear in the balance sheet of Indian
Companies

These include investment in government or trust securities, in shares, debentures or bonds (both quoted and
unquoted.

“Marketable securities” which are really converted into cash should be taken as part of current assets

Liquidity refers to the ease with which assets can be converted into cash; thus, current assets are more liquid
than fixed assets.

Those current assets that can be most quickly converted into cash are known as quick assets.

 
 HOUSEHOLD UTENSILS LTD
Balance sheet at 31 December 1987

Liabilities      Rs. Assets        Rs.

           
             
         
Fixed Assets
     
Invested by        
Shareholders 119,740 Goodwill, at cost
 1,600    
Land, at cost    
Building, at Cost 11,000    
Plant and machinery,    
   
at cost 8,800    
Motor vehicle, at    
cost 1,200    
Fixture & fittings, at    
cost 2,200    

24,800 20,200 21,200

Less Depreciation
4,600
Total Fixed assets  

     
       Investments  
         
 
Long-term     58,890         2,000
Marketable
loans securities
(market value
2,100)
 HOUSEHOLD UTENSILS LTD
Balance sheet at 31 December 1987

Liabilities      Rs. Assets        Rs.

           
    Current Assets      
         
         
    Inventories, at cost or      
    Current market value,      
 
  whichever is the lower: 29,500    
 
     
  Finished products 1,200
     
  Work in progress 50,000 81,300  
Owed to trade   Raw Materials 600  
creditors, etc.    
Other supplies
     
26,100
     
    Accounts receivable 550  
    Deposits 20  
  Advances to employees 315  
     
  Other receivables 1180
   
    Advance income tax  
    Prepaid expenses (rent 200  
    Paid in advance, etc.) 263,265  
  251,850  
 
   
     
  ---
  Less :Provision for doubtful 11,415  
    items
 
 
Cash in banks 250
 
  Cash in hand  
Total liabilities    
  Total current assets 333,400

Total Assets 356,600

356,600
 
VALUATION OF ASSETS

The valuation of assets is always an estimate. The relevant accounting concepts for such
estimates of value are described in the “generally accepted accounting standards” of a
country. In some countries such standards are required by law.

Current assets are generally valued at cost or market value, whichever is the lower.

Fixed assets are generally valued at cost or revaluation, less accumulated depreciation. 
VALUATION OF ASSETS
Type of Asset Nature of Asset                    How valued
 
Cash in banks at cost
           Cash in hand
              Quick assets
 (most liquid)          Marketable securities at cost or lower
                   Realizable value
 
   Deposits at cost
           Prepaid expenses (e.g. rent)
 
 
      Current 
Assets,           Accounts receivable  at full value less
               Employee accounts provision for doubtful
Other expenses outstanding items
 
 
Finished products at cost or 
current
Work in progress market value,
Assets   Inventories                        Raw materials whichever is
   (or stocks) Other supplies
the lower
 
 
Land at cost or 
Valuation
 
Fixed assets
(least liquid Building
Plant and machinery at cost less
Fixtures and fittings  depreciation
Motor vehicles
CURRENT LIABILITIES AND FIXED LIABILITIES

A company’s liabilities are usually listed on a balance sheet in three main groups: current liabilities;
fixed liabilities; and shareholders’ funds (or owners’ equity).

The shareholders are the owners of the company. On the balance sheet the funds they provide are
shown separately from those of “outsiders” who have loaned money to the company.

Current and fixed liabilities are together referred to as “outside liabilities”.

Fixed liabilities represent the company’s long-term finance, and include items on which interest is
payable, such as long-term loans from financial institutions.

Current liabilities represent the company’s short-term finance, and include items like short-term
loans, bank overdrafts and trade accounts payable (trade creditors).
 HOUSEHOLD UTENSILS LTD.
Balance sheet at 31 December 1987
LIABILITIES Rs. ASSETS          Rs.
Shareholder’s Funds 119,740 Fixed assets              21,200

Fixed liabilities Investments
2,000
Loan from financial institution
at 10% interest, repayable 2001
(secured on all plants & machinery)50,000
Debentures at 9% repayable 1995
(secured on the real estate    8,000
  
 58,000
Current Liabilities Current Assets
333,400
Bank overdraft 84,160
Trade accounts payable 31,000
Other accounts payable   8,000
Provision for taxation    2,810
Provision for accrued expenses    2,000
Interest due on fixed liabilities
(still unpaid)      890
Total liabilities 178,860
356,600 Total assets 356.60 
 
SHAREHOLDERS’ FUNDS

The money which the shareholders put into the company in this way is described on the balance
sheet as the capital issued and subscribed

In return, at the discretion of the directors, the company makes payments to shareholders (pays
dividends) out of the profits made by the company.

In addition to the capital subscribed, shareholders’ funds also include capital reserve and revenue
reserve, which represent profits retained in the business and not paid to shareholders. (Capital
reserve and revenue reserve will be considered in more detail in the next set.)
ANALYSIS OF BALANCE SHEET