FORM OF THE BALANCE SHEET

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1 FORM OF THE BALANCE SHEET Balance sheet is prepared in one of two basic forms: horizontal or vertical. The vertical format is more popular now days.. The order of asset and liability may also vary. However, conventional practice is to follow liquidity as the basis for presentation. Balance sheets are generally presented in a comparative format (current year and the previous year). Exhibit 6.6 shows the balance sheet of NALCO, which can be taken as the standard format. Appendix 6.1 shows the Schedule VI of the Companies Act, Schedule provides the format for presenting the balance sheet. 21

2 Let us see the balance sheet of NALCO limited. 22

3 Some observations: The balance sheet is true as on the 31 st March 2005 and The shareholders fund has increased. A large component of the shareholders fund is reserves and surplus. No change in the share capital Loans have decreased during this period Current liabilities have increased marginally. Fixed assets have increased by one and half times The company has huge cash and bank balance + To do: Take the balance sheet of any company of your choice and compare it with the above and write a note on your observations. Condensed Balance Sheet Condensed balance sheet shows the following combined items: Shareholders Fund = Share Capital + Reserves &Surplus Deferred Tax Asset + Deferred Tax Liabilities Long Term Liabilities= Borrowings or Loan Funds (secured and unsecured) Current Liabilities = Creditors + Advance Incomes +Outstanding Expenses + Provisions Fixed Assets = All Non-Current Assets other than Investments Current Assets = Cash +Debtors + Stock Working Capital = Current Assets Current Liabilities Table 6.13 shows the condensed balance sheet of NALCO. In the process you will get introduced to some more accounting terms which will be taken up for further discussion in the subsequent chapters. Table : 6.13 Balance Sheet of NALCO at on 31st March ( Rs. In crores) Liabilities Assets Shareholders' Funds Fixed Assets Long Term Loan 0 0 Investments 0 0 Current Liabilities Current Assets Total Total

4 As discussed at the beginning of the chapter balance sheet is the reflection of the accounting equation as on that date. The balance sheet of NALCO as presented in Table 6.13 can be shown in the form of accounting equation too. Table 6.13 Accounting Equation of NALCO (Rs. In crores) Shareholders Fund + Long Term Loans + Current Liabilities = Fixed Asset + Current Assets Investment Let see some interrelationship between the above financial items: Shareholders Fund + Long Term Loans = Fixed Assets +Investment + Current Assets Current Liabilities, or Shareholders Fund + Long Term Loans = Fixed Assets +Investment + Working Capital The above equation shows the sources of financing long term assets and the excess of current assets over the current liabilities. The long term funds is known as the capital employed. Therefore the accounting equation can be presented as follows: Capital Employed = Fixed Assets +Investment + Working Capital. Table 6.14 shows the balance sheet of NALCO with a focus on the capital employed. Table 6.14 Balance Sheet of NALCO at on 31st March Shareholders' Funds Long Term Loan 0 0 Capital Employed FA Investments 0 0 Working Capital Capital Employed We can further change the accounting equation. We can show the accounting equation from point of the shareholders fund, which in fact reflects the basic accounting equation. Shareholders Fund + Long Term Loans = Fixed Assets +Investment + Current Assets Current Liabilities; or Shareholders Fund = Fixed Assets +Investment + Current Assets Current Liabilities - Long Term Loans; or Shareholders Fund = Total Assets - Long Term Loans + Current Liabilities; or Shareholders Fund = Total Assets Liabilities 24

5 Table 6.15 shows the balance sheet of NALCO with a focus on the shareholders fund Table : 6.15 Balance Sheet of NALCO at on 31st March Shareholders' Funds FA Investments 0 0 Working Capital Capital Employed Less Long Term loans 0 0 Shareholders' Funds Summary : The balance sheet shows the financial condition of an entity as on a particular date. It shows the sources: shareholders equity, loans: short term and long term and the corresponding assets. Sources of funds of an enterprise can be divided into three categories: capital, loans, profit. Capital is the money contributed by the owners Loan is the money contributed by the outsiders Profit is the money generated by the business Every transaction will affect the balance sheet either directly or indirectly. Capital is shown at the face value and money collected over and above the face value is shown separately as share premium. Profit of a company may be distributed among the shareholders or retained in the business. Dividend is declared as a % of the face value of the shares. Balance sheet is not affected by the market price of the share. Profit sometimes may be distributed in the form of shares. Such process is called capitalisation of reserves or issue of bonus shares. Assets are divided into three categories: fixed assets, investments, and current assets. Fixed assets are generally shown at cost less depreciation. Depreciation for the year is shown in the income statement and the depreciation till date is shown in the balance sheet as accumulated depreciation Investments outside the business are generally shown at the cost price. Inventory is also shown at the cost or market value which ever is lower. 25

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