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Detailed Format and Elements of Balance Sheet

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Namaste, welcome to the 4th session of our Financial Accounting course; I hope you haveenjoyed first three sessions and first session 1 and 2 where very much introductory. We hadjust started what is financial accounting, then we went to understand financial statementsparticularly the starting point of balance sheet which we saw how it gets emerged frombusiness cycle, we also discussed about what is there.In the annual report in the last session we had started a little detailed discussion ofbalance sheet. So, I will just go back to the formats which we have seen, those of whohave first time seen the balance sheet this was the short format at one glance to understandwhat is a balance sheet.On one side we have got assets which provide a list of all the resources with the enterprise,on the other side we have got liabilities. So, liabilities are giving you the providersfor the resources or there are internal people like owners who have given us owners funds,there are external people like banks who have given us external liabilities both are listedunder the head liabilities.After this we had started discussion on format as per schedule VI, now few of you may bewondering what is the schedule VI mean. Now, schedule six is a schedule under companiesact. So, for all the companies the balance sheet is to be prepared as per this format.Now, under schedule VI the first item not the first part is I refers to equity and liabilitiesthat is what we are discuss in the last session, under that you have got 1 that is shareholdersfunds I hope you have understood it. If you have a doubt in anything not only here, buteven of the earlier items please feel free to discuss it on discussion forums. So, theteam from IIT we would like to respond to all your queries please be responsive discussa lot on your discussion forum. As I have told you earlier I hope you havedecided about your company, download the annual report of that company look at the balancesheet; as we are studying a particular financial statement please look at the balance sheetof your company. And, any doubts you have you can discuss with your classmates you canalso discuss and ask it on to IIT team we will be responding to each and every questionfrom your side ok. So, under item number 1 there are three sub items share capital, reservesand surplus and money received against share warrant.So, capital share capital is a money which is put in by the owners, reserves and surplusrefers to the profits which are ploughed in; c refers to the money which is collected fromcertain people and in future they will receive shares, so far they have not received anyshares such money is shown as money received against share warrant. In item number 2 shareapplication money pending allotment this is also similar; the prospective investors havepaid me some money, shares are to be issued to them but are not yet issued, till thattime the money is shown under item number 2 that is share application money pendingallotment. Once they are allotted it will go in 1 if they are not allotted it will berefunded that is the item number 2. Item number 3 is non-current liabilities againyou have got four items a are long term borrowings. So, these are the loans taken for more than1 year, b is deferred tax liability. Now, this is a tax liability the amount which isto be paid as tax, but not in the current year it will be paid after 2, 3, 4 years dueto certain provisions under tax laws. They are differed tax liabilities later on we aregoing to discuss how they are calculated, but once we complete our balance sheet.c is other long term liabilities, so other than a and b if there are deposits receivedfor more than 1 year or if there are some salaries which are unpaid for a longer periodthey are all shown under other long current long term liabilities, then 3D is long termprovisions. So, provisions are those items in liabilities of which the amount is notknown with substantial accuracy. So, a provision is created and it is shown under 3D especiallyif it is for more than 1 year.The next one which discussed was item number 4 in item number 4 a, then item number 4 wherecurrent liabilities as the name suggest these are for less than 1 year. So, 4 a is shortterm borrowings, so loans taken for less than 1 year 4 b we are trade payables. So, theseare various purchases made, but we have not yet paid related to our regular business,so they are called as trade payables. 4 c are any other current liabilities like doyou remember any examples we are discussed outstanding salaries or outstanding electricitybills or outstanding office expenses outstanding stationary charges.So, on any expense which is not yet paid, but is payable in 1 year that is other currentliabilities. 4 d are short term provisions, so again estimated liabilities which are payablein short term. So, in our last session we had come up to item 4 this was a quick revisionI am taking revision every time especially in the earlier sessions but, I hope you areattentive and you have understood whatever we have discuss till now.Now, let us go to the II part of balance sheet that is known as assets. So, these are theproperties or these are the resources which are available with the enterprise in two againthe item number 1 is noncurrent asset as the name suggests noncurrent means it is for morethan 1 year or you can also call it as a long term in that you have got a; a refers to fixedassets. In a again we have got a small i and ii, so a 1 is tangible assets a 2 is intangibleassets. In our second session we are discussed whatis a fixed asset I hope you remember. So, fixed assets refer to the infrastructure ofthe undertaking, it refers to those assets which are used for running the business cyclethey themselves do not take part in business cycle, they do not get converted, but theysupport the money cycle. So, which are such items?For example, we have got land, we may have a building, we may have a machinery, we mayhave vehicles they are with us for a longer period, they help us in doing business orthey help us in doing our regular activities, but they are themselves or not getting converted,so it is not a stock ok. So, these are fixed assets they are of two types one is tangiblethe other is intangible. Tangible means that can be touched, that hasphysically existence. So, all the examples which we discussed like land building vehiclesthese are all tangible second one are intangibles, they have no physical existence and cannotbe touched, but they have a value. So, what are such assets can you think of any example?I think all of you use computers we can see the computer screen and the other parts thatis all your hardware, but computer also has some software built into it that softwareyou cannot touch or you cannot feel it but you can see its impact that is an exampleof intangible asset. Can you think of any other example? Thereare patents, there are copyrights, there are trademarks these all are rights of the companyor rights of the owner, but not of physical in nature it is a intellectual property allthese are examples of intangible fixed assets. This is an era aware intangible assets arebecoming more important than tangible assets say 100 years before tangible assets werevery important. So, large companies like ford or general motors or general electric wirebig companies. Today which are the big company’s? I thinkall of you know now it is Google, it is Facebook it is, Microsoft do they have physical assetsof course, they have little bit, but most of their assets are intangible in nature anywaythis was just for discussion in general for any company there will be some tangible assetssome intangible assets through be shown under a 1 and 2, a 3 is capital work in progress.Now, what is meant by work in progress? That means, some work is going on something whichis under construction, capital because it’s a long term. So, suppose building is underconstruction once it is ready then we will call it as a tangible fixed asset, right nowthe building is not ready, but some work is on we have spent some money and suppose itwill take three years to complete. So, as of now I cannot show it is a building or asa tangible asset neither I can show the money paid just as an advanced because some workis already happened that is why it is shown as a capital work in progress.The fourth one is intangible assets under development. Now, what is this? Just likecapital work in progress lot of intangible assets are being created or being developed,but still they are not ready like you have applied for patent, but patent is not yetsanctioned, but you have already spend lot of amount on research, then that will be aintangible asset under development or for example, you are developing some softwaredevelopment testing has not happened. So, it is not in the ready stage for use,but cost has been incurred in the development process that will be shown as intangible assetunder development. Now, when you studied your company’s balance sheet for last two threeyears please try to look at item 3 and 4 carefully because, this year suppose it is under constructionor under development next year it will be ready. And, it would have gone into tangibleor intangible asset right because we expect in 1 or 2 years the work will be completedand it will be classified either as tangible or intangible.Suppose a particular item is shown as under construction for a long period 2, 3, 4 years,then we will have a doubt as to why that item is not getting ready, is it a fraud to showthat item or there are genuine problems; if non-completing it of course, we cannot concludeanything right away. But, I am just saying that you can just look at the details of item3 and 4 and say that these items are stagnant or they are getting ready and new items areby being newly constructed ok. Now, this a that is fixed assets as 1, 2,3, 4 the total of that is considered as a total of fixed assets. Now, the second itemthat is 1 b is non current investment, in our last to last session we are discusseda bit about what is an investment, do you remember? So, if you put in some money outsideyour business it is called as a investment within your own business if you constructa building construct or purchase stock purchase that is not an investment; investment meansyou have to give it money to some other company or somewhere else. So, can you give any examplesof investments? So, for example, shares for example, bankdeposits for examples units of mutual fund if you invest money with some other companyor with the bank then it is a investment if that investment is done for more than 1 yearit will be shown under 1 bs non-current investment. Some of you may be interested in finance infuture you might be wanting to do career in finance you would have heard of terms likeportfolio management or stock market whatever the money you are putting in there that isall under 1 b. And there is a science of how that is managed,how do you invest, when do you buy, when do you sell all those things are studied underportfolio management of course, right now will not going to it, but what portfolio theyhave your company has you can see from 1 b. So, when you go to balance sheet of your companyhave a look at 1 b to understand what type of investments they are making.Now, go to 1 c that is deferred tax asset if you remember in the last session and evenin the beginning of today’s session we discussed about deferred tax liability. Now, deferredmeans something which is not due today or in the current year which is due in lateryears, if it is a liability it will be shown as a deferred tax liability this is a deferredtax asset. So, today you will not get the benefit ofit you will get it after two three years, then it is called as a deferred tax asset.Does it mean after three years government will pay you tax? Of course, no governmentpays us tax, but government gives you some benefits which you can use after 2 years,after 3 years benefit of remission of tax or reduction of tax that is called as a deferredtax asset. Exactly what is this item we will discuss later on, but if there is any suchasset in existence it will be shown under 1 c ok.Now, the next item is d long term loans and advances. Now, what do you mean by loans andadvances? Loan is of two types; one, the company has taken loan, then it will be shown as aborrowing under the liabilities we have seen it in the last session, but suppose companygives loan, then to distinguish it from normal loans we will call it as loan and advance.So, if company gives loan to somebody or advance to somebody it is considered as a loans andadvances. So, in future if you see the word loan andadvance always keep in mind that it is an asset item if there is only loan then it isa liability, if it is a loan and advance there is a hint to you that it is an asset ok. Now,since this is for a longer period we are showing it as a long term loans and advance. Whatcan be an example? For example, suppose company gives advance to employee to purchase newhouse, now the housing advance will obviously not be for one year only, it may be for 5years, ten years, 15 years, then it will be shown as a long term loan and advance.It can also be a loan or advance given to some supplier for two three years let us saysupplier wants to buy a new machinery. So, we will give some loan to be repaid after3 years, then it will be shown as a long term loan and advance. Then 1 e other noncurrentassets, so apart from abcd if there is any other long term asset then it will be shownas a other noncurrent asset ok. So, under item 1 we have discussed whole of long termassets. Now, let us go to second, so in assets wehave got one as noncurrent, two as current I think you all know the definition theseare all going to mature or which are going to be liquidated or converted within a periodof 1 year. If you remember in our session 1 we have seen the business cycle. So, ina business cycle mostly it is a exchange of fixed assets noncurrent assets we will discussor we will deal in them only after two three years, four years, five years, but currentassets’ transactions take place every moment, they are continuously being exchanged.So, under 2 1 we have got current investments I think you remember what is an investment.So, we put money outside our business it is called investment, for example, if we havea three-month bank FD, then it will be shown as a current investment or if we invest inshares and sell them after two months, then it will be a current investment ok, then 2b is inventories.Now, what do you understand by inventory? The other name for it is stocks we might havesome raw material that are converted to finished goods or we can purchase finished goods allthis taken together are known as inventories. So, these are items which are meant to beconverted or sold in our normal course of business which will be shown under 2 b c istrade payables sorry trade receivables we have already seen trade payables under liability.What is a trade receivable?. In B2B business normally when we sell thegoods across the counter we do not get the payment immediately, we will sell the goods,we will send the bill after 15 days, 1 month, 2 month customer will make the payment. So,till the time the money is received it is called as a trade receivable. In other wordswhenever we make a credit sale till the time we do not get the payment the sale amountwill be shown as a trade receivable, the world trade shows that it’s a day to day activities,it is a regular business activity relating to or creating a receivable for me it willbe called as a trade receivable 2 c. Now 2 d cash and cash equivalent I think everybodyunderstand cash, everybody likes cash because it is very easy to spend. What is the cashequivalent? There are items which are almost like cash;they can be very easily converted into cash, so they are called as cash equivalents. Lateron we are going to study cash flow statement if you remember that is a third statement,when we study cash flow we will go into details about what is cash and cash equivalent, butright now you can just assume it that its more or less like a cash. Now e that is shortterm loans and advances we have just discussed loans and advance I hope you remember. So,these are the loans given by the entity, so when we give loan to employee or to othercompany or advance to somebody, all that is under the head loans and advances.So, under that if there for less than 1 year we will call it as a short term loans andadvance, 2 f other current assets. So, a to e if there is a particular item which is ofshort term in nature, but we does not fit in a to e it will be shown under f as othercurrent assets I hope you have got what is an asset. So, it is a total of 1 plus 2 simpleif it is more than 1 year the it is non-current if less than 1 year then it is current. So,we get here the total of assets some of you might have many queries do not worry we aregoing to again discuss the assets taking each asset we will discuss it in detail right nowlet us go ahead.So, if you look at the elements of balance sheet there are three parts one is a assetthen it is funded by a liability here I mean a external liability or by the owners whichis called as owners fund. Now, let us go into detail of each item. So, how do you definean asset?This is a probable future economic benefit what is owned or controlled. So, there aretwo conditions to be satisfied to be called an asset; one, the item should have an economicvalue and two, the item should be owned. If you remember on day 1, the first session Ihad told you that a particular asset does not come in balance sheet because it doesnot satisfy condition number 2 do you remember that item that item is a human asset, theemployee, scientist, managers, executives working with the company actually they arevery important asset to the entity, but that cannot be shown in the balance sheet becauselook at the definition it should have a probable economic value which they have, but it shouldalso be owned or control. So, employees are not our slaves they arenot owned by the company, so they cannot be shown as owned assets that is why human assetsyou would not see in the balance sheet. Now, any other assets first of all you have tosee whether it’s a it meets this two conditions I think examples you are all aware cash, land,building, investment, machinery think of another 10 examples and I think you can include itin your assignment. Now, again the definition is given that itis a resource controlled by the enterprise as a result of some past event, but it shouldhave a future value. The second point is resources must have a cost or value that can be measuredreliably, if we have an asset that has some value but there is no reliable estimationavailable, then also we cannot value it and show it in the balance sheet.Now, the types of assets we have got fixed assets, current assets and investments. Ithink with this we will stop here we have already discussed it when we discuss the balancesheet, but we will take up each item now individually and will explain it in detail. But, till thattime as I have told you please go to the balance sheet of your company and look at what assetsthey have, then only you will really have a real type of learning Namaste.