Financial Accounting and Analysis
Prof. Padmini Srinivasan
Introduction to Balance Sheet
In the last module, we spoke about the important financial statements of a company, the balance
sheet, the income statement, and the cash flow statement.
A balance sheet is prepared at a point in time usually at the end of the accounting year. It is a
snapshot view and changes with the changing pointing in time. We will now discuss the various
elements of the balance sheet in greater detail.
As mentioned earlier, the balance sheet consists of assets, liability, and equity.
Let us discuss in detail, what do we mean by assets?
An asset is defined as a resource controlled by the entity as a result of past events from which future
economic benefits are expected to flow to the entity.
The company uses these resources for carrying on its operating activity or for generating any
revenues. Examples of assets include property plant, and equipment, furniture, current assets such
as inventory and cash and so on.
Let us now take two examples to discuss "What are assets and we will also apply the definition of
the term assets as we have just discussed?"
What is the most important asset of Microsoft?
Trigger: Cash. They have a lot. I read in the balance sheet they were having cash, cash equivalents,
and short-term investments of $96.5 billion dollars as of (30/06/2016) June 30th, 2015.
Clever: How about employees? They are important assets for Microsoft. They are the ones who
developed the software, in turn, creating the revenue for the company.
Professor: "Trigger and Clever" very good observation. Microsoft has a lot of cash and Microsoft also
has people. Now, let us discuss whether we would find people and human resource in the balance
sheet of companies.
Trigger: We cannot have them in the balance sheet as they keep moving from the balance sheet to
balance sheet.
Professor: That's a good observation "Trigger" that we do not include human resource because they
keep moving from company to company.
Although, human resource is an important asset, yet it is not found in the balance sheet.
Have you ever thought about it?
As in accounting, we record only transactions that are measurable in monetary terms. Even if human
resources is measurable in monetary terms sometimes it is very important that they are objectively
measured. There are ways to measure human resource today and we can take them as an asset in
the balance sheet, but these are not objectively measurable that means if different people use
different methods they will arrive at different numbers and therefore we don't record human
resource in the balance sheet.
Let us discuss the second aspect of an asset. What is the most important asset of Coca-Cola?
© All Rights Reserved. This document has been authored by Prof. Padmini Srinivasan and is permitted for use only within the course "Financial
Accounting and Analysis" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise – without the prior permission of the author.
Financial Accounting and Analysis
Prof. Padmini Srinivasan
Trigger: Formula.
Professor: Oh!
Clever: Brand name.
Professor: Very good.
Both formula and brand are very important asset for Coca-Cola. Will we find brand name in the
balance sheet? If yes, "Why?" Or if no, "Why not?" The answer to this question is very simple. We do
not find brand name in the balance sheet particularly if the brand is a self-generated asset.
Although, the brand name is one of the most important economic asset of a company we do not
enter it in the balance sheet for several reasons. A company's brand is built over several years. Can
you and is there a particular event that says, “This event give rise to this brand." Remember the
definition we said, "Asset is something that we are able to identify based on a past event." So brand
can you identify a particular event, which says this event give rise to this brand. If not, we cannot
record this as an asset. More importantly, brands again a self-generated brand, in particular, are not
objectively measurable and therefore we do not include in the balance sheet, but all these answers
are my answers.
Let us look at, what the accounting standard and what the accounting rule IFRS state?
IFRS simply state that internally generated intangible asset cannot be taken into the balance sheet.
More about intangible asset later in the session.
Assets are now broadly classified into two parts:
1. Non-current assets. And,
2. The other is the "Current Assets."
Let us now move to the other side of the balance sheet also called as the liability and equity side of
balance sheet. Let us first discuss liabilities.
What is a liability?
A liability is what a company owns to others.
Remember they are the present obligation of a company arising from past events. Discharging a
liability will result in the outflow of resources from the company. Resources meaning, it could be in
the form of cash, or services, or goods that a company needs to give somebody or give the
customer. Some examples of liability could include borrowings from banks, bonds issued by the
company, accounts payable, sometimes referred as trade payable, notes payable, and so on.
In other words, these are obligations of the business towards providers of finance or providers of
goods and services to the business.
Like assets, liabilities are also classified into two parts or two kinds.
1. Non-current liabilities which are basically long-term liabilities. And
2. Current liabilities that are short-term in nature.
Non-current liabilities are liabilities which are due for payment after one-year. For example, long-
term borrowing that needs to be repaid say, "A maturity after 2 years or 5 years or 10 years" you can
also have current liabilities which is due for payment within period of 12 months or within the
operating cycle whichever is longer. Examples of current liabilities could include trade payables or
© All Rights Reserved. This document has been authored by Prof. Padmini Srinivasan and is permitted for use only within the course "Financial
Accounting and Analysis" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise – without the prior permission of the author.
Financial Accounting and Analysis
Prof. Padmini Srinivasan
let's say you are suppliers from whom you have bought goods on credit, but not yet paid them, or
other kinds of current liabilities. Let us now move to equity.
What is equity in the equation?
Assets equal to liability plus equity.
Equity has several meanings. When you talk about financing a business the amount of money
contributed by an investor is called as equity capital or equity in short. It represents ownership in the
business.
Equity capital is also called as stockholders equity or shareholders’ funds in some places. Equity
represents the capital invested initially by the owners or investors in a business. For example, I know
Clever owns 200 shares in CBA Corporation. That stock or share represents his ownership in CBA
Corporation. Equity also includes retained earnings and reserves. They are called as reserves and
surplus in some countries.
Retained earnings represents profit that are re-invested in the business.
© All Rights Reserved. This document has been authored by Prof. Padmini Srinivasan and is permitted for use only within the course "Financial
Accounting and Analysis" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise – without the prior permission of the author.
