A balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It details the company's assets, liabilities, and shareholders' equity, giving insight into its financial health and stability
Financial Accounting and Analysis
Prof. Padmini Srinivasan
Week 2: Handout
Handout for week 2
Understanding Balance sheet
The purpose of financial accounting is generating status and performance reports in the
form of Balance Sheet and Statement of Profit & Loss (Income Statement). We can proceed
to the next step of understanding the form, content and the manner of determining the values
that appear in these two reports. The format and content (items to be disclosed) of the
Balance Sheet and the Income statement is usually mandated by the regulators in a country.
See a few illustrations in the Appendix.
BALANCE SHEET
The balance sheet provides a snapshot view of the assets, liabilities and equity of an
enterprise at a given point of time. In short we can say what the company owns and what
the company owes to others. An asset is a resource controlled by an enterprise as a result
of events and from which future economic benefits are expected to flow to the enterprise
and the assets are arising from a past identifiable event and are objectively measurable.
Liability is a present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow from the enterprise of resources embodying
economic benefits. Equity is the residual interest in the assets of the enterprise deducting
all its other liabilities (or simply liabilities).
How do these assets, liabilities and owners’ equity arise? All enterprises (also referred to
as 'firms') make financial decisions, investment decisions and operating decisions. These
decisions when implemented give rise to assets, liabilities and equity. Please note that
every investment decision has to be matched, in terms of value with the financing decision
involving raising money from outsiders or owners or both. As you have understood, the
balance sheet can be represented as follows.
Assets = Liabilities + Equity
Most countries around the world require Consolidated Financial Statements. Some countries
such as India prepare both the Consolidated and Standalone Financial statements. More about
this is provided in the next module.
Let us now briefly discuss the various elements of the balance sheet.
I. ASSETS
, Financial Accounting and Analysis
Prof. Padmini Srinivasan
Week 2: Handout
Assets are resources which are expected to provide a firm with future economic benefits, by
way of cash flows or by their use. Resources are recognized as assets in accounting when (a)
the firm acquires rights over them as a result of a past transaction and (b) the firm can quantify
future economic benefits with a reasonable degree of accuracy.
As you can observe from the definition, assets give us future benefits either by use or through
generation of cash flows. Things that constitute assets are Plant and Machinery, Cash and Bank
Balances, Goods for sale, etc.
Assets are classified as follows:
• Non-current assets
• Current assets
1.1 Non-current Assets:
Non-current assets are relatively long-lived assets. They consist of fixed assets, non-current
investments, other non-current items such as long-term loans and advances, and other non-
current assets. Sometimes, you may find other classifications such as property plant and
equipment, intangible assets, available for sale securities and other non-current assets. These
act as the backbone of the business or help perform the operations of the business . These are
important resources to the business as they help in performing the business operations
effectively and smoothly.
Let us elaborate each of the following.
Fixed assets
These are assets meant to be used for producing/providing goods or services and not intended
to be sold in the ordinary course of business. These have a useful life of more than one year
and are of material value. Fixed assets comprise tangible fixed assets and intangible assets.
Tangible fixed assets also called as Property Plant and Equipment include items such as land,
buildings, plant, machinery used in the manufacturing process, furniture & fixtures, computers
etc. Fixed Assets are disclosed as Net fixed assets. Net fixed assets represents the gross book
value less accumulated depreciation. The gross book value is normally the historical cost
though this can be substituted with a revalued figure.
Historical cost of a fixed asset is all costs incurred to bring the asset to its working condition
for its intended use. The cost of an item of fixed asset comprises its purchase price, including
import duties and other taxes and any other costs directly attributable to the fixed asset. The
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