How to Read or Analyse a Balance Sheet – What is Balance Sheet?
How to Read or Analyse a Balance Sheet, My this article is about analysing the financials of any company which may be private limited company or public company. Reading the financials is the main and basic thing that every finance manager or Chartered Accountant should be knowing about. If you are not knowing the same, then no Company would be keeping you as an employee for a long time. This is the very basic thing every Finance person should be knowing. I have explained this over detail in this article.
How to Read or Analyse a Balance Sheet
What is Balance Sheet ?
Balance Sheet is the financial Statement which is showing what the company is “OWNING” & what the company is “OWING”. In short the balance sheet gives the company’s financial strength. Any expert reading the balance sheet would come to know about the company’s future and the past. The word Balance Sheet has been evolved because it talks about the balancing between the Assets and the Liabilities. Assets and the Liabilities are the two parts of the balance sheet. Assets means the things the company or particular firm or individual is owning, on the other hand, Liabilities means the things which the company or firm or individual is liable to pay to someone. The next part of the balance sheet is Equity, which is also known as Net worth of the company. It indicates the companies total strength and what returns the company are getting. Now I would start discussing each of the interior parts of the balance sheet.
1. Shareholders Funds –
This indicates the sources through which the company is financed. It mainly includes Share capital, Reserves and surplus, etc. Share capital would include two things – Equity Share capital & Preference Share Capital.
2. Non current liabilities
It are the liabilities which are to be paid of after end of the reporting date. It mainly includes Long term Borrowings, Deferred tax liabilities, Long term provisions, etc.
3. Long term borrowings –
This are the loans which have been taken from the bank or the financial institutions which are due not due in the current year, but in the coming years. This loans can be of two types- secured or unsecured. Secured is the one which is secured against some asset. Unsecured is the one which is not secured by any asset.
4. Deferred Tax Liability
This is caused because of the difference in the taxable profit and the accounting profit.
5. Long term provisions
This are the provisions which are not made only for the current year but for the coming years too. Examples of Long term provisions are Employee provident fund, gratuity fund, etc.
6. Current Liabilities
This are the liabilities which re due within 1 year from the date of reporting. This mainly includes Trade payables, short term provisions, short term borrowings etc.
7. Non Current Assets –
Non current assets are the assets which are held for more than 1 year. Examples of Non current assets are – Fixed Assets, Non Current Investments, Long term Loans and Advances, etc. Fixed Assets includes Tangible Assets & Intangible Assets.
8. Current Assets –
This assets are the one which are used in normal routine day to day functioning of the company. They are held for the doing the business. They are acquired to be taken with an intention to retain up to 12 months and not more than that. Examples are Trade receivables, Inventory, Current Investments, Cash and Cash Equivalents, etc.
Recommended Read –
- AS 12 Accounting for Government Grants
- Accounting Standard 13 Accounting for investments
- Accounting Standard 16 Accounting for Borrowing Costs
- Accounting Standard 3, Cash Flow Statement Full Guide
- Accounting standard 2, Inventory valuation Complete Guide
- Accounting Standard 15: Accounting for Retirement Benefits