Balance sheet : what is it?

  • Balance sheet is a statement that shows what a business owns and owes AT a particular point of time. (Remember, the income statement shows revenues and related expenses FOR a period of time , usually a year).
  • ALL COMPANIES are statutorily required to come out with a final statement of accounts every year. The final statement of accounts consist of the balance-sheet, the profit and loss (P&L) account, supporting schedules, the auditor’s report, a statement of accounting policies and additional notes on account. The balance-sheet and P&L account are designed to give a bird’s eye view of the state of affairs of a company.
  • Schedule VI of the Companies Act details the format and typical contents of the balance-sheet and P&L account. Companies are given the option to have their statements in either the `horizontal’ or `vertical’ format. Most companies follow the latter.
  • Companies are also given the freedom to have the figures published in thousands, lakhs or Crores of rupees depending upon the scale and magnitude of operations.
  • A typical vertical balance-sheet’s design is like this- The company gets it’s sources of funds – from shares issues, loans borrowed etc.. and applies the funds to run the business in  fixed assets, investments, stock etc..
  • Logically, at any point of time, the total of sources of funds would be equal to the total of application of funds.
  • But law in India (Companies ACT) requires companies to disclose more facts about the deployment of funds and not just a summary. So, a typical balance sheet is accompanied by schedules, notes, bifurcations, tables, disclosures.. and hence, the whole things looks complicated at  the beginning for a newbie.
  • Balance sheet is also called ‘statement of financial position’

Conclusion

The balance sheet of a company reflects it’s financial position at a particular point of time. It shows what the company owns and owes after doing business for a year. So, analysis of balance sheet of a company becomes vital for an investor. To do that, you need to know what are the components of the balance sheet . More about that in our next lesson.

You may like these posts:

  1. The components of financial statements
  2. The Income statement : Basics
  3. How to read an Annual report.

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