Financial Statement Analysis

Understanding Balance Sheet Part 2

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
Another way of understanding
Balance Sheet
➢ Balance Sheet is statement that shows –
○ From where a firm gets funds – SOURCES OF FUNDS
○ Where a firm use funds – APPLICATIONS OF FUNDS

Sources of Funds Applications of funds

Sources of Funds (IN)

Applications of Funds (OUT)

Total Sources of Funds Total Applications of funds

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
WHY Balance Sheets are prepared?
Purpose of preparing Balance Sheet

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
Three most important reasons for
preparing Balance Sheet of a firm

To have summary of the balances of those accounts

1
which are NOT closed during an accounting period.

To facilitate carrying of balances from one accounting

2
period to another accounting period

To help in the evaluation of the financial position of a

3
firm by its users
Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
WHAT all contents we have in a Balance
Sheet?
Contents and Components of a Balance Sheet

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
Contents of a Balance Sheet
➢A Balance Sheet has THREE main contents:

○ Assets

○ Outsider’s Liabilities

○ Owners' Equity

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
Assets may include…
➢Fixed Assets: ➢Current Assets:
○ Land, ○ Stock/Inventories,
○ Building, ○ Sundry Debtors/Receivables,
○ Machinery, ○ Cash Balance,
○ Furniture, ○ Bank Balance,
○ Vehicles, ○ Prepaid Expenses
○ Computers,
○ Patents, trade marks

➢Investments
Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
Owners’ Equity
➢Owners' Equity/Owners' Fund/Shareholders' Fund:

○ Capital or Share Capital

○ Retained Earnings/Reserves and Surplus

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
Outsiders’ Liabilities may include…
➢ Long-term or Non-Current Liabilities:
○ Loans from banks/Financial Institutions
○ Mortgages
○ Debentures/Bonds
○ Public Deposits

➢ Current Liabilities:
○ Sundry Creditors/Bills Payable
○ Advance from Customers
○ Outstanding Expenses
○ Provisions
Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
How should Balance Sheet be presented?
Format of Balance Sheet

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
Format as per the Companies Act, 2013

➢The format of financial statements are given in the Schedule-III of the

Companies Act, 2013.

Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited
 Division-II, Schedule-III, the Companies Act, 2013

Source: mca.gov.in
Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited