Balance Sheet Income Statement

Shows financial position Shows financial results

Tells the information of assets, liabilities and capital
Shows the balance of assets, liabilities and capital
(till date) i.e., since the business started.
Based on an accounting equation. The total of
Assets must match with a total of capital and
liabilities together.
Tells the profit or loss made by a business
Shows the profitability for the financial year
under consideration. Hence it is good to say that
the P&L statement is standalone.
Revenues – expenses = Profit/loss

Sample balance sheet

Components of Balance Sheet

1. SHAREHOLDER FUNDS

Shareholder Funds = Share capital + Reserves

1.1 Share capital

• Share capital is the amount invested by the general public for use in the business.
• The general public who provides the funds to the company gets shares of the company
and is also promised a return known as a dividend.
• Imagine, Company ABC issues 1000 shares, with each share having a face value of Rs.10
each. In this case, the total share capital would be Rs.10 x 1000 = Rs.10,000/-

1.2 Reserves

• It is a portion of available earnings that business owners keep aside to meet any sort of
financial contingencies.
• For instance, firm owners may use their reserves to invest, purchase fixed assets, install
new equipment, pay dividends to shareholders, settle legal obligations, etc.

2. LIABILITIES

• Obligations to be paid by a business in future.

• There are mainly two types of liabilities – short-term (current) liabilities and long-term
(non-current) liabilities

2.1. Short-term liabilities

• The obligations/debts, are to be paid within 12 months/365 days.

• Also known as ‘current liabilities’
• If you buy a mobile phone on EMI (via a credit card) you obviously plan to repay
(instalment) to your credit card company within a few months. This becomes your
‘current liability’.
• However, if you buy an apartment by seeking a 15-year home loan from a bank, it
becomes your ‘long term liability’.
• The current liabilities are divided into:
I. short-term borrowings (loans taken for a short period, less than a year)
II. trade payables (creditors, from whom goods are purchased on credit)
III. outstanding expenses (bills such as electricity bill, water bill, rent etc. for
which services are availed but such bills are not yet paid.
IV. short term provisions (funds set aside by business to cover future
expenses)

2.2. Long-term liabilities

• obligations to be paid beyond 1 year in future.

• The long-term liabilities are divided into:
I. Long-term liabilities (loans taken for a long period, exceeding one year such
as 3 years, 5 years or 10 years).
II. Provisions (money set aside for employee benefits such as gratuity; leave
encashment, provident funds etc.)
 III. Deferred tax liabilities (The deferred tax liability is basically a provision for
future tax payments. The company foresees a situation where it may have to
pay additional taxes in the future; hence it set aside some funds for this
purpose).

3. ASSETS

• Resources which are used in business for getting economic benefits.

• The ownership of such assets belongs to the business.
• There are two types of assets – fixed assets and current assets.

3.1. Fixed Assets

• Assets which are purchased for long-term use, are not likely to be converted quickly
into cash easily.
• There are 4 types of fixed assets:
• Tangible fixed assets (which can be seen, touched, felt, and carry physical existence
such as land building, machinery, and furniture).
• Intangible fixed assets (which cannot be seen, touched, felt, and carry no physical
existence such as patents, copyrights, licences, trademarks, or brand value).
• Capital work in progress (CWIP includes building under construction, machinery
under assembly etc. at the time of preparing the balance sheet.)
• Intangible assets under development (The work in the process could be patent filing,
copyright filing, brand development etc.)

3.2. Current Assets

• Assets which are in a form of cash or can be converted into cash easily within a year.
• Examples of current assets are as follows:
• Cash balance (in the form of cash)
• Bank balance (fixed deposits of one year can be converted into cash easily)
• Stock (when sold in the market, is converted into cash)
• Debtors/receivables (money to be collected from persons to whom credit sales are
made)
• Prepaid expenses (such as insurance premium paid in advance, rent paid in advance
for whom a benefit is not yet availed but the bill is paid in advance).