Balance Sheet Explained: Structure, Assets, Liabilities with Examples

Balance Sheet Explained

Balance sheet represents the snapshot of financial position of business firm at any given point of time. It represents the assets, liabilities and equity of firm on a particular day.

  • It indicates the financial position of a business on a particular date or at a point of time
  • It shows the various sources from which funds has been raised by business
  • It shows the various forms in which money has been employed in business

A Balance sheet always relates to a particular point of time or date and not a period. It is always expressed in monetary value. It is usually prepared on close of the accounting period. It is one of the financial statements of a business.

Structure of Balance Sheet

The Balance Sheet consists of:

  • Heading: The heading of balance sheet mentions name of firm and date to which it applies.
  • Assets
  • Liabilities

The balance sheet of firm can be represented in two forms:

  1. T Form Balance Sheet: In this form, the balance sheet is divided into two columns. On left side, you will find the liabilities of firm and on right side, you will find the assets of firm. This form of balance sheet looks like English alphabet ‘T’, therefore it is called ‘T’ form Balance Sheet.
    T-form of Balance Sheet explained
  2. Report Form Balance Sheet: In report form Balance Sheet, the assets and liabilities are shown in vertical manner. The assets are listed first, followed by liabilities and then stakeholder’s equity.
    Report form of Balance Sheet explained

Assets in Balance Sheet

Assets are resources owned by firm which are expected to provide the future benefits to firm. The benefits can be in the form of higher cash inflow or lower cash outflow.

Assets are classified as:

  • Non-Current Assets
  • Current Assets

Non-Current Assets

Non-Current assets are long lived assets. It comprises of:

  • Fixed Assets: The assets which are of permanent in nature and are regularly used for creating goods and services are called Fixed Assets. The total value of assets at their original cost is called Gross Block. The Gross block less accumulated depreciation is called Net Block. The fixed assets consist of:
    • Tangible fixed assets: It consists of land, building, plant, machinery, furniture & fixtures. These are tangible and long-lived assets owned by firm. These are reported in balance sheet at net book value i.e. Gross book value – depreciation (accumulated)
    • Intangible fixed assets: These assets do not have physical dimension. These items cannot be touched. These assets add value to the firm. It consists of patents, copyright, trademark and goodwill. These are reported in balance sheet at net book value i.e. Gross value – amortisation (accumulated)
    • Capital work-in-progress: The cost incurred on fixed asset which is still under-construction stage is called capital work-in-progress. For example, cost incurred on constructing a building, major repairs to a building, or an equipment installation etc.
  • Long term investments: It consists of financial securities like equity shares, preference shares, debentures of other companies. It represents the money invested by firm in long term securities for profits.
  • Deferred tax assets
  • Long term loans and advances: It consists of loans and advances to subsidiaries, associate companies, employees for period of more than one year.
  • Other non-current assets

Current Assets

It consists of all assets which are held in form of cash or are likely to be converted into cash in near future or in operating cycle of business. The operating cycle is the time period taken to convert cash into inventory and selling inventory, converting receivables to cash. An asset is said to be current asset if:

  • It is expected to be realised or intended for sale/consumed in company’s normal operating cycle.
  • It is held for purpose of trading
  • It is expected to be realised within 12 months of reporting date
  • It is cash equivalent

It comprises of:

  • Current Investments: The investments that are made for relatively shorter period of time. These are valued at cost price.
    • Short term holdings of units or shares of Mutual Funds
    • These investments are done to generate income from short term cash surplus
    • Current investments are carried at market value or cost value, whichever is lower
  • Inventories
    • It consists of raw material, finished goods, packing material, work-in-progress, stores and spares
    • Inventories are valued at cost or net realisable value
  • Trade Receivables
    • It is also called account receivables or sundry debtors. It represents amount owed to firm by customers. The debtors that default on payment are called bad debts. Debtors shown in balance sheet are arrived at after deducting the bad debts.
  • Cash & Cash equivalents: It is most liquid form of current assets. These funds are readily available for use. It consists of:
    • Cash-in-hand
    • Credit balance with banks
  • Short term loans and advances
    • Loan and advances given to suppliers, employees, deposits with other agencies and others recoverable in a year
  • Prepaid Expenses: Sometimes certain expenses are paid in advance like rent, taxes, insurance etc. These types of expenses are counted in current assets because if these expenses were not made in advance; they would have been shown in balance sheet as cash.
  • Other current assets
    • Interest accrued on investments
    • Dividend receivable
    • Asset held for sale

Liabilities in Balance Sheet

The liability represents what the firm owes to others. These are claims of outsiders raised against the business. The business uses various good and services on credit to conduct its normal course of operations. The liabilities of firm are classified as:

  • Shareholder funds
  • Non-Current liabilities
  • Current liabilities

Shareholder Funds

It is the contribution made by shareholders of firm. Technically, it is the capital infused by owners of the business concern. It is further classified as:

  • Share Capital: The share capital is comprised of equity capital and preference share capital. The equity capital is the contribution made by owners of business. Whereas, the preference share capital is the contribution of preference shareholders which carries dividend.
  • Reserves and Surplus: The Reserves and Surplus comprises of retained earnings, capital reserves, security premium reserve, revaluation reserves, general reserves and others

Non-Current Liabilities

Those liabilities which are to be paid after one year.

  • Long term borrowings: Borrowings which have tenor of more than one year. It consists of:
    • Term loans
    • Rupee bonds
    • Foreign currency bonds
    • Public deposits
  • Deferred tax liability
  • Long-term provisions

Current Liabilities

Liabilities which are due to be settled within 12 months. These liabilities are due for payment in short run.

  • Short term borrowings: Borrowings which have tenor of less than one year. These liabilities are due for payment within one year. It consists of:
    • Working capital loans
    • Commercial papers
    • Public deposit maturing after one year
  • Trade payable
  • Short term provisions