Understanding Balance Sheet and financial statements

Understanding Balance Sheet and financial statements

A business starts by raising funds. Accounting principals Differentiates an Enterprise from its owner( in the eyes of law they are not).
When Shri Prakash brings Rs5 lacs for his business Prakash Trading Co, Company is liable to Shri Prakash to the extent of Rs 5 lacs.
Thus this appears in B/S as
Liabilities ! Assets
Capital Prakash Rs5 lac. ! Cash Rs 5 lac
.
Thus any increase in liability (0 to 5 lac) becomes a source of Fund .These funds are used or generate Asset Cash (from 0 to 5) and hence increase Asset is a Use of funds.
Liability- It is the amount to be paid out or borrowed.
Asset - It is cash or equivalent owned or things possessed by the enterprise.
Under double entry book keeping the Fundamental Rule is for
Every Debit entry there will be equivalent Credit entry .
Accounting to 2nd Rule /principle is

Debit What comes in (Cash ac debited)
Credit the giver (Capital ac of Prakash)

As a result remember all friends from Non Commerce background ASSETS always show a DEBIT balance and Liabilities a Credit balance.
eg :- Land and Building ac, Machinery ac,Fur Fix ac ,Cash/Investment ac,Debtors ac being Assets always have CREDIT balances.
Similarly Loans by a firm from banks and others, Capital and Reserves,Sundry Creditors are amounts to be paid by the firm and hence are liabilities.
Liabilities are shown on left side and Assets on Right as per practice.
We can draw an important inference that any increase in liability (say loan of Rs10 lacs) is SOURCE Of Fund.
And increase in ASSET is a Use of Fund(Machinery bought for Rs10,lac).

Opposite of above also applies ie Any Decrease in Liability say TL repaid is a use of Fund.
And any Decrease in Assets brings in fund ie It is a Source of Fund say a Motor Car is sold.
Thus comparison of two B Sheets can give us Funds/Cash flows.

BALANCE SHEET is a still PHOTO of position of Assets and Liabilities at a particular moment of time and hence said as BS as at.
On receipt of BS we classify it in main 3 groups on both Assets and Liabilities side to undertake its analysis in technical it is called as Balance Sheet Spread.
LIABILITIES
1 Current Liabilities - CL
2 Term Liabilities. - TL
3 Capital and Reserves. NW

CL- All liabilities due within 12 mths from B/S date.
TL - All liabilities due after 12 months from BS date.
N W :- Net Worth ie Capital and Reserves and Profit not distributed.
CL + TL are repayable to outside hence called as Outside liabilities.
NW is Owners capital and payable only at closure of business. Are called OWN Funds.

ASSETS
1 Current assets - CA
2 Fixed Assets. - FA
3 Non Current assets. - NCA
CA - are assets meant for conversation into cash within business cycle (eg RM to SFG to FG to Cash or Debtors to Cash) or they are cash or equivalent.
FA- Not meant for cash ,help in carrying out the economic activity.
NCA - Asset which can't classified in either class eg Old stock, old debtors(NPA); FD with Electricity board. They also include another class ie Intangible or Fictitious assets ie not having physical existence like goodwill, trade marks, know how, royalty etc.

PLEASE LET ME KNOW shall I continue????
IT Wii be Useful for 1 2 3 exam

Gokhale Waman

 
 

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