A company’s balance sheet is a statement of its assets and liabilities as of a specified date. A company’s assets may be categorized into two major groups viz noncurrent assets and current assets. In contrast, the liabilities may also be categorized into two other groups: long-term liabilities (including the shareholders’ equity, i.e., paid-up share capital and reserves) and short-term liabilities.
The preparation of a company’s balance sheet needs to be per the Companies Act, 2013, some of which are as follows:
1) Schedule III (Section 129) of the Act gives a proforma in which a company’s balance sheet needs to be prepared. It also prescribes the disclosure norms, which need to be adhered to by disclosing the necessary information in the balance sheet:
2) All the balance sheet items need to be put under either of the two groups, viz. current and noncurrent,
3) Schedule III has prohibited companies from presenting the assets and liabilities in the balance sheet in the order of liquidity, which is not in tune with the provisions of Indian Accounting Standards! (Ind-AS1) (cf. Presentation of Financial Statements”).
Importance of Balance Sheet
The Balance Sheet of a business organization is an important document for various stakeholders (insiders and outsiders) like owners, management, regulatory bodies, tax authorities, etc. Its significance is evident from the following:
1) Financial Position
Financial position of the business organization may be assessed at a glance.
2) Knowledge of Proprietary Ratio
It reflects the relationship between the owners’ funds and the total assets of an organization.
3) Protection against Uncertainty
Current assets and current liabilities may be ascertained through the balance sheet, which enables the lenders/analysts to calculate the working capital requirements of the organization.
Contents/Items under Balance Sheet
As per the provisions of the Companies Act 2013, the assets and liabilities of a company are shown under two heads on either side, viz. ‘Equity and Liabilities’ and ‘Assets.
Various items appearing under the above two heads are described in detail in the following points:
Equity and Liabilities
1) Shareholders’ Funds Share Capital:
The following items are kept under this:
a) Authorized shares-their number and amount
b) Number of total shares issued under the categories: Subscribed and fully paid-up, and Subscribed but not fully paid up.
c) Value of each share at par
d) Number of shares outstanding: At the beginning of the accounting period; and at the end of the accounting period, and reconciliation thereof.
e) Details like the number of shares held by each shareholder, more than 5% of the company’s shares issued and subscribed as on the balance sheet date.
f) Details of shares (like aggregate number and class of such shares) allotted as fully paid-up for consideration other than cash.
g) Details of shares (like aggregate number and class of such shares) allotted as fully paid-up by way of bonus shares
h) Calls remaining unpaid with details such as the aggregate value of calls unpaid by directors and officers as on the balance sheet date.
i) Amount lying in ‘share forfeited account”.
ii) Reserves and Surplus:
The following items find a place under this sub-head:
a) Capital Reserve
b) Securities Premium (Reserve)
c) Capital Redemption Reserve
d) Debenture Redemption Reserve
e) Revaluation Reserve
f) Amount outstanding in ‘Share Options Outstanding Account”
g) Other reserves: General Reserve, Tax Reserve, Subsidy Reserve, Amalgamation Reserve.
h) Surplus balance lying in the statement of profit and loss.
If the statement of Profit & Loss reveals a debit balance (deficit instead of surplus), the same must be deducted from the total reserves.
iii) Money Received against Share Warrants
A share warrant is a financial instrument that is issued against the receipt of monies from prospective shareholders. A share warrant holder is entitled to acquire shares in place of the share warrants held by him. Share warrants are, therefore, liabilities of a company. They are, in fact, part of the share capital but are shown separately in the balance sheet.
2) Share Application Money Pending Allotment
If a company has issued shares, but as on the Balance Sheet date, the allotment has not been made (allotment made after the Balance Sheet date), the application money received would be treated in the following manner.
i) Share application money, which does not exceed the amount of the issued capital, and is therefore non-refundable, needs to be shown under the head ‘share application money pending allotment”.
ii) Share application money, which is refundable due to some reason or the other (e.g., the amount of application money being less than the minimum stipulated subscription), is required to be shown separately under the head ‘other current liabilities.
3) Noncurrent Liabilities
A liability, which is not a current liability, is classified as a noncurrent liability. Current liability has been defined above. Examples of noncurrent liabilities are:
i) Long-term borrowings, such as debentures, term loans, etc.;
ii) Deferred Tax Liabilities (on a net basis), and
iii) Other Long-term Liabilities like trade payables representing the purchase of fixed assets and interest accrued thereon, PF contribution, etc.
iv) Long-Term Provisions, also called noncurrent provisions, are the provisions in which the claims are likely to be settled after 12 months from the balance sheet date, e.g., for employees’ benefits, provisions for warranties, etc.
Hence, the liabilities which are not classified as current shall be classified as noncurrent:
i) Long-term Borrowings
Borrowings mean the amount taken as a loan by the company. Its examples are:
b) Premium payable on redemption of debentures
c) Term loans from banks/other parties
d) Fixed Deposits/Public Deposits
e) Other loans and advances
ii) Deferred Tax Liabilities (Net)
A deferred tax liability comes into force when accounting income exceeds taxable income.
iii) Other Long-term Liabilities
Trade payables for purchasing Fixed Assets and interest accrued, Provisional Fund contribution.
iv) Long-Term Provisions
All provisions for which the related claims are expected to be settled beyond 12 months after the reporting date are classified as noncurrent provisions. (Provision for employee benefits, provision for warranties),
4) Current Liabilities
As per the definition given in the Companies Act, current liability is a liability that is:
i) Likely to be settled during the current operating cycle. An operating cycle may be defined as the time between (a) the acquisition of assets (raw materials) for processing and (b) the realization of the sale proceeds of the finished goods in the form of cash or cash equivalent when the operating cycle is nix given, it is assumed to be of 12 months.
ii) Dues to be met within twelve months from the balance sheet date.
iii) Acquired and retained with the sole objective of trading.
iv) Without a provision of unconditional right for deferment beyond twelve months from the balance sheet date.
If due, for some reason or the other, it is impossible to determine the operating cycle; it is presumed to be twelve months.
Some examples of current liabilities have been discussed in the following points:
i) Short-Term Borrowings
Borrowings resorted to by a company, which need to be repaid within 12 months from their raising, are termed short-term borrowings. Some examples of short-term borrowings are:
a) Demand loans were taken from a bank
b) Overdraft facility availed
c) Cash credit facility availed
d) Loans taken from related parties
e) Deposits accepted.
ii) Trade Payables
During the normal course of business, the amount payable against the purchase of goods and services is referred to as the trade payables’. They may be in the form of sundry creditors or ‘bills payable.’
iii) Other Current Liabilities
Other current liabilities are those liabilities that are neither ‘short-term borrowings nor trade payables. They may be of the following types:
a) Current Maturities of Long-Term Debt: The part of long-term debt which becomes due for payment within 12 months from the balance sheet date.
b) Interest Accrued but not Due on Borrowings: If a company follows the accrual accounting concept, necessary provisions are required for the interest that has accrued but is still not due for payment. For example, If a company has issued debentures, wherein the interest is payable twice in a year, i.e., 30 June and 31 December, and the company prepares its Balance Sheet on 31 March, it is imperative on the part of the company to provide for the interest accrued during the quarter January to March every year, as the interest for the above quarter would become payable along with the quarter ended 30 June on 30 June.
c) Interest Accrued and Due on Borrowings: If the interest on debentures issued by a company is payable at half-yearly intervals, i.e., 30 June and 31 December, and interest accrued for the half-year June-December are paid on 31 March (because the company prepares its balance sheet on 31 March). It needs to be classified as ‘interest accrued and due’.
d) Any income received in advance
e) Unpaid Dividends: The dividends paid by the company to shareholders but are yet to be claimed by them are known as unpaid dividends.
f) Amount of application money received in excess, which is due for refund along with interest due thereon.
g) Amount of matured deposits, along with interest accrued thereon, which remain unpaid.
h) Amount of matured debentures along with interest accrued thereon, which remain unpaid.
i) Outstanding expenses
j) Dividends, which have not been claimed
l) Provident Funds of employees, which are payable.
iv) Short-Term Provisions
Provisions, the claim in respect of which is likely to be settled within 12 months, find its place under this sub-head, e.g., provision for doubtful debts, provision for tax, provision for the proposed dividend, etc.
Assets of a company may be classified into the following two categories:
1) Non-current Assets
All the assets, other than those which are current assets, are classified as ‘noncurrent assets.
All sub-categories of noncurrent assets are discussed in brief in the following points:
i) Fixed Assets
Fixed assets include the following types of assets:
a) Tangible Assets
Fixed assets, which have a physical form and, as such, are visible and can be touched, are known as tangible assets. Some examples of fixed tangible assets are land, buildings, plants, machinery, equipment, furniture, fixtures, vehicles, etc.
b) Intangible Assets
Assets that are not tangible, i.e., can’t be seen or touched, as they don’t have a physical presence, are known as intangible assets. Some examples of intangible assets are goodwill, trademarks, patents, copyrights, soft-wares, and mining rights—Intellectual Property Rights, formulae, models, designs, licenses, franchisees, etc.
c) Capital Work-in-Progress
Regarding the Revised Schedule VI, capital advances must be shown as a part of long-term loans and advances. As such, they (capital advances) should not be a part of the capital work-in-process, for example, self-constructed items of property, plant, and equipment.
d) Intangible Assets under Development
The intangible assets, such as patents. Intellectual Property Rights, etc., are in the process of being developed by an organization
ii) Noncurrent Investments
Investments acquired and retained for a long term (not for resale soon) are placed under this category, e.g., investment in property, equity shares, preference shares, debentures, mutual funds, Government securities, etc.
iii) Deferred Tax Asset
A deferred tax asset comes into force when the taxable income exceeds the accounting income.
iv) Long-Term Loans and Advances
Loans and advances repayable in cash or kind beyond 12 months from the balance sheet date are placed under this category. They may be of the following types:
a) Capital Advances
Advances extended for the acquisition of fixed assets.
b) Security Deposits
Amount deposited with various authorities for a period exceeding 12 months, e.g., security deposited with electricity and telephone departments.
c) Other loans and advances
Long-term loans to employees, e.g., housing, education, vehicle, etc. Long-term advances to suppliers, etc.
d) Other noncurrent assets
Noncurrent assets may be classified as under Long-term Trade Receivables, including those on deferred credit terms, may be further sub-classified into the following categories: Secured and considered goods, Unsecured but considered goods, and Doubtful.
e) Allowance for bad and doubtful loans and advances, if any, needs to be shown separately under the appropriate head
f) Loans and advances due by the following need to be disclosed separately
The company’s directors and other officers; Any of the above, viz. directors and officers of the company, either severally or jointly with any other person, or amount due by the firms and private companies, in which any of the company’s directors is a partner/director
2) Current Asset
An asset is qualified to be classified as a current asset if it fulfills any one of the following conditions:
i) It is likely to be sold/consumed during the company’s normal operating cycle.
ii) The asset is acquired with the underlying basic intention of trading.
iii) The asset will likely be realized within 12 months from the reporting date.
iv) The asset is either cash or cash equivalent unless it is prohibited from being exchanged or used to settle a liability within 12 months from the reporting date.
The following types of assets are considered current assets:
i) Current Investments
Current investments are those made for a short period, with a horizon of a maximum of 12 months. Equity shares, preference shares, debentures, mutual funds, Government securities, etc., may be put under this investment category.
Inventories include all the stocks, which are acquired or created during the manufacturing process, or which are held for trading purposes. Some examples of inventories are listed below:
a) Raw Materials
c) Finished Goods
e) Stores and Spares
f) Loose Tools
iii) Trade Receivables
Trade receivables, realizable within 12 months from the balance sheet date, place under the category of current assets. Any realizable trade receivable after 12 months must place under the category ‘other noncurrent assets. Examples are selling goods and services made when the business is working.
iv) Cash and Cash Equivalent
Cash and cash equivalents are ‘current assets. Some examples of cash and cash equivalents are as follows:
a) Cash in hand
b) Bank balances
c) Cheques, bank drafts, etc., on hand
d) Others (e.g., money at call or short notice)
The following items need to be disclosed separately:
a) Out of the bank balances, the amount earmarked for specific purposes, e.g., unpaid dividends.
b) Out of the bank balances, the amount kept as margin money, security against borrowings, guarantee, or any other commitments.
c) Any repatriation clause relating to cash and bank balances.
d) Bank deposits with a maturity period of more than 12 months.
v) Short-term Loans and Advances
Short-term loans and advances granted by a company to be classified as under:
a) Loans and advances to related parties with details
b) Loans and advances to other parties
The entire portfolio of short-term loans and advances may further be sub-classified as under:
a) Secured and considered good
b) Unsecured but considered good