UNDERSTANDING BALANCE SHEET
Balance Sheet
1. Asset structure and its financing
2.Efficient management of assets and
liabilities
3.Prepared as on a given date in a specific
format -generally vertical form
4.Two years comparative figures
5. Grouping and sub grouping of assets and
liabilities
Assets
FIXED
TANGIBLE
INTANGIBLE
CURRENT
Fixed Assets are held by the enterprise for use in the
production or supply of goods and services. Fixed assets
are also called as long term assets Fixed assets provides
facilities to produce and deliver goods and services. They
are generally held by the business for a long time
Tangible fixed Assets have physical existence viz: land,
buildings,plant and machinery, furniture, equipments,
motor vehicles etc.
Intangible fixed assets have no physical existence they
represent legal rights or economic benefits enjoyed by the
company.viz patants, trademarks ‘goodwill, franchisee
rights etc.
Natural resources like oilwells,mines and forests are also
fixed assets and they are treated as a category by itself
due to their special nature.
Current Assets :Such assets have the following characteristics:
- It is held for sale in the ordinary course of the
business.
- It is expected to be realised in the normal operating
cycle
- It is cash or cash equivalent
Operating cycle : a) more than 12 months
b) less than 12 months
Criteria of 12 months
CURRENT ASSETS
1. Inventories
2. Debtors
3. Cash & Bank Balances ( Incl. Cash
equivalents – treasury bills, equity shares
held as investments )
LOANS & ADVANCES
4. Advances – staff advances, advances to
suppliers
5. Advance Income Tax
6. Securities to various Govt. depts.
7. ICDs
Fictitious Assets – no future economic benefit
Miscellaneous expenditure like preliminary expenses,
deferred revenue expenditure and profit and loss a/c dr
balance.
LIABILITIES
Liabilities are those obligations which has to be
paid in future. They may be due to present or
past transactions.
All expected future payments are not liabilities.
Liabilities must arise from a completed
transaction.
If a company has entered into a 3 year contract
to supply goods, the liability needs to be
recorded only when the goods are supplied
LIABILITIES
LONG TERM
SECURED
UNSECURED
CURRENT
DEFINITE
CONTINGENT
ESTIMATED
Secured liabilities
1.
Debentures : Secured and unsecured
Registered and unregistered
Convertible and term
Zero coupon ( deep discount bonds )
Callable
Redeemable and Irredeemable
Debentures issued at a premium
Debentures issued at a discount
Debenture issue expenses
Conversion of debentures into equity
Debenture Redemption Fund
Mortgages payable – legal arrangement wherein a borrowing
is secured by company’s immovable properties.
Conditional mortgage / equitable mortgage
Leases - legal agreement whereby the lessor conveys the
right to use an asset for a specific period of time in return for a
rent
Operating lease
Financial lease – FMV or PV of future lease payments whichever
is less.
Pensions and other post retirement benefits
Deferred tax liability – Financial charge is less
than tax charge
Deferred tax asset – Financial charge is more than
tax charge
Accounting profit and taxable income
Temporary and permanent differences
Some questions
???
1. Why is it important to distinguish between
current liabilities
and long term liabilities
2. If the market interest rate is higher than the coupon rate should
debentures be issued at a premium, discount or at par
Off balance Sheet financing
1.
2.
3.
Transfer of receivables with recourse
Product financing arrangement
Derivatives
1. Details of Accounts Ltd. are given.
Compute 1. COGS 2.Gross Profit 3. Operating expenses 4. Non
operating expenses 5. Net operating profit 5. Net Profit 6.
Retained earnings
Turnover
Materials consumed
Processing charges
Power & Fuel
Excise duty
Wages
Managerial rem.
Selling expenses
10.00
5.00
0.03
0.80
0.50
0.24
0.03
0.01
Loss on sale of assets
Office expenses
Interest on deb.
Tax
Proposed dividend
0.01
0.03
0.30
0.05
0.15
2.
Share capital
2.00
(20000 shares of Rs.10/-)
Debentures
1.00
Reserves & Surplus 3.00
Public deposits
0.25
Bank overdraft
0.05
Creditors
1.00
Accumulated depn. 1.00
Debtors
1.50
Inventory
0.50
Prepaid Expenses
0.02
Adv. from customers
0.05
Provision for tax
0.05
Outstanding expenses 0.01
Advance tax paid
0.05
Fixed Assets
3.00
Trade Investments
0.20
Mkt. Investments
0.02
Compute :
1. Net worth 2.Total capital employed
2. Net Fixed Assets
3. Current & Quick Assets
4. Current & Quick liabilities
3. The carrying cost of a machine as on 01.01.10 is
Rs.100000. The company revalues the assets on that
date at Rs.140000. What should be the accounting
treatment in the books.
4. A Ltd. appoints B as his agent for selling goods for
a commission of 5% on sales made. The agent made a
sale of Rs.300000 during the year. What should be the
amount of commission actually paid to the agent. (
TDS rate :5% + sc+e.cess )
Also discuss the accounting treatment in the books of
accounts.
5. A Ltd. has investments of Rs.100000 in
debentures carrying an interest rate of 12%.
What should be the income recognised in the
books of accounts. ( TDS rate 10%
+sc+e.cess)
6. A Ltd. sells TV sets with a warranty of 1
year. In the year 2009-10 it sold 100000
units . The company estimates that 80% of
the units shall have no defects. , 15% shall
have minor defects ( costing Rs.500 each )
and 5% will have major defects ( costing
Rs.10000 each ). Should it recognise the
liability in the books of accounts.
7. The ED of a company wants your opinion on
the following areas :
1.
2.
3.
The prices of some of the machineries bought last
year has gone up by 100 to 150 percent. The
management wants to include the machineries at the
market prices in the financial statements.
One of the factory buildings was seriously damaged
by the recent earthquake but it happened after the
balance sheet date. Should a provision be made in
the accounts for the same.
The management proposes to discontinue the
maintainence of fixed assets register due to a cost
reduction programme in the company.
8.
Whether the amount of long term debt
payable in the next 12 months should be
shown as current liability ?
9.
How should interest accrued on loans not
due be treated ?
10. A company’s records shows the following :
a) Income Tax pending appeals – Rs.230500
b) Sales tax demand paid under protest – Rs.
278950
c) Counter claim by contractors – Rs. 85000
How should the above items be treated and
disclosed in Accounts ?
Classify the following accounts in financial statements into
Tangible fixed assets, Intangible fixed assets, current
assets , current liabilities, long term liabilities, equity,
income, gains, losses , expenses

1.Receivables 2.Land, 3.Goodwill, 4.Bad debt, 5.Purchases,
6.Sales, 7.Real estate ( not used for business ) 8. Bad debt,
9.Rents & taxes, 10.Insurance premium paid in advance,
11.Insurance premium paid, 12.Insurance claim received,13
Freight inward,14 Freight outward,15. deposit with custom
authority,16. Sales tax from sales,17. Bank charges,18.
Depreciation,19. Share capital,20. Shares in Reliance
Industries, 21.Excise duty paid,22. Advances from
customers, 23.Advances to suppliers, 24.Copy right,
25.Cheques in hand, 26.Bills receivable, 27.Goods lying with
customers for approval, 28.Staff welfare expenses,
29.Repairs and maintenance, 30.Interest paid, 31.Power &
fuel, 32.Discount received from suppliers, 33,Discount
allowed to customers, 34.Bank charges, 35.Cash credit form
Bank of India, 36.Railway siding, 37.Travelling expenses,
38.Training expenses,39. Fixed deposit with Banks, 40.Loss
by fire, 41.Profit on sale of assets, 42.Creditors, 43.Advances
to employees, 44.Expenses of epoxy painting ( painting done
every 5 years ), 45.Loan from IDBI, 46.Retained earnings,
Plant & Machinery, 47.Provision for taxation ,48. Advance tax