Comprehensive Balance Sheet Notes

Chapter 9: Balance Sheet Fundamentals

Introduction and Definition

A Balance Sheet is a financial statement that reports the composition of assets, equity, and
liabilities of a company as of a specific date, typically at the end of the financial year.

Key Characteristics:

• Prescribed format under Schedule III of The Companies Act, 2013

• Comprised of two sides that always balance (Assets = Equity + Liabilities)
• Assets represent what the company owns
• Equity and Liabilities represent what the company owes
• Assets show the usage of funds, while Equity & Liabilities show the sources of
funds
• Represents the financial position at the end of the accounting period

Balance Sheet Structure

Two-Sided Equation
ASSETS = EQUITY + LIABILITIES

Assets Side:

• Resources owned by the enterprise

• Shows how funds are utilized

Equity & Liabilities Side:

• Funds supplied by owners and creditors

• Shows sources of funds and claims on assets

ASSETS
Definition of Assets

A resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.

Three Key Criteria:

 1. Future economic benefits are expected
2. Controlled by the enterprise
3. Control is because of past events

Classification of Assets

1. NON-CURRENT ASSETS

Assets intended to be used over a long period of time (usually > 12 months)

a) Property, Plant and Equipment (PPE)

• Used for production of goods and services

• Cost is appropriated over useful life through depreciation
• Balance sheet shows depreciated value
• Examples: Land, Buildings, Plant & Equipment, Furniture & Fixtures, Vehicles,
Office Equipment, Bearer Plants

b) Capital Work-in-Progress

• PPE assets that are in progress of being ready for use

• Not yet ready for use as of balance sheet date
• Once ready, transferred to PPE

c) Right-of-Use Assets

• Represents lessee's right to use an underlying asset for the lease term
• Recognized along with lease liability at commencement of lease contract

d) Investment Property

• Land or building held to earn rentals or capital appreciation or both

• Not for production, supply of goods/services, or administrative purposes
• Not for sale in ordinary course of business
• Carried at cost less accumulated depreciation and impairment losses

e) Goodwill

• Intangible asset measured as difference between consideration paid for acquisition

and value of net assets acquired
• Presented separately from other intangible assets
• Important: Internally generated goodwill shall NOT be recognized as an asset

f) Other Intangible Assets

• Cost apportioned over useful life through amortization

• Carried at cost less accumulated amortization
• Examples: Brands/Trademarks, Computer Software, Publishing Titles, Mining
Rights, Copyrights, Patents, IPRs, Recipes, Formulae, Models, Designs, Licenses,
Franchises
g) Intangible Assets Under Development

• Similar to capital work-in-progress but for intangible assets

• Assets in progress of being ready for use
• Once completed, transferred to relevant intangible asset category

h) Biological Assets (Other than Bearer Plants)

• Living animals or plants

• Excludes bearer plants

i) Financial Assets (Non-Current)

Four Sub-categories:

1. Investments - in subsidiaries, joint ventures, associates, and other investments

2. Trade Receivables - amounts due from customers
3. Loans - money lent to others
4. Others - miscellaneous financial assets

j) Deferred Tax Assets (Net)

• Recognized due to timing differences between taxable income and reported income
• When enterprise pays higher taxes currently that will reverse in future
• Net amount shown when deferred tax assets > deferred tax liabilities

k) Non-Current Tax Assets (Net)

• Tax assets that won't be realized within 12 months

l) Other Non-Current Assets

• Residual category
• Examples: Capital Advances, Security Deposits, Advances to Related Parties

2. CURRENT ASSETS

Assets held primarily for trading purposes; more liquid than non-current assets

a) Inventories

Classifications:

• Raw Materials
• Work-in-Progress
• Finished Goods
• Stock-in-Trade
• Stores and Spares
• Loose Tools
• Others
b) Financial Assets (Current)

1. Investments - short-term investments

2. Trade Receivables - amounts due from customers within operating cycle
3. Cash and Cash Equivalents - highly liquid assets (90 days maturity)
4. Bank Balances Other than Cash and Cash Equivalents
5. Loans - short-term loans given
6. Others - miscellaneous current financial assets

c) Current Tax Assets (Net)

• When advance tax paid > tax due for current and prior periods
• Excess tax paid recognized as asset

d) Other Current Assets

• Residual category
• Examples: Prepaid Expenses, Income Earned but Not Received

3. Assets Classified as Held-for-Sale

• Assets intended for disposal rather than continuing use

Operating Cycle Concept

• Time between acquisition of assets for processing and their realization in cash/cash
equivalents
• Standard: Usually 12 months
• Exception: Some industries have longer cycles (e.g., Sobha real estate: 5 years)
• Assets and liabilities are classified as current based on operating cycle

EQUITY AND LIABILITIES

Equity

Represents the residual interest in assets after settlement of all liabilities (owners' claims)

1. Equity Share Capital

• Total paid-up share capital

• Amount paid by shareholders for equity shares (only face value portion)

Additional Information in Notes:

• Number and amount of authorized shares

• Number of issued, subscribed, and fully paid shares
• Number of subscribed but not fully paid shares
• Par value per share
2. Other Equity

• Amount accumulated over years from business operations

• Belongs to equity shareholders
• Includes all reserves and surpluses

Components:

• Reserves: Balances earmarked for specific purposes

• Surpluses: Retained earnings after specific allocations to reserves

Important Note: Can be negative if accumulated losses exceed accumulated profits (as seen
in SpiceJet example: ₹25,858.47 crores negative equity)

Liabilities

Present obligation arising from past events, expected to result in outflow on settlement

Forms of Settlement:

• Making payment (e.g., to creditors)

• Transfer of other assets (e.g., against advance revenue)
• Perform services (e.g., warranty obligations)

1. NON-CURRENT LIABILITIES

Expected to be settled after 12 months from balance sheet date

a) Financial Liabilities (Non-Current)

1. Borrowings - long-term loans

2. Trade Payables - amounts due to suppliers (long-term)
3. Other Financial Liabilities - miscellaneous financial obligations

b) Provisions (Non-Current)

• Liability of uncertain timing or amount

• Present obligation from past event with probable outflow of resources
• Reliable estimate of amount required

Sub-categories:

• Provision for Employee Benefits

• Others (specify nature)

c) Deferred Tax Liabilities (Net)

• When enterprise pays lower taxes currently, resulting in higher future tax liability
• Net amount shown when deferred tax liabilities > deferred tax assets
d) Other Non-Current Liabilities

• Residual category
• Examples: Advances received, Security deposits from customers/vendors

2. CURRENT LIABILITIES

Expected to be paid within 12 months or within normal operating cycle

a) Financial Liabilities (Current)

1. Current Borrowings - short-term loans

2. Current Trade Payables - amounts due to suppliers
o Total outstanding dues to micro and small enterprises
o Total outstanding dues to creditors other than micro and small enterprises
o Acceptances
3. Other Current Financial Liabilities - miscellaneous short-term financial obligations

b) Other Current Liabilities

• Revenue received in advance (unearned revenue)

• Others

c) Current Provisions

• Provision for Employee Benefits

• Others

d) Current Tax Liabilities (Net)

• Tax payable
• Expenses and penalties related to income tax

OFF-BALANCE SHEET ITEMS

Contingent Liabilities

• Contingent upon happening or non-happening of future events

• Not recorded as liabilities but disclosed in notes

Commitments

• Commitments made by the firm

• Not yet in form of asset or liability on balance sheet date
• Disclosed in notes to accounts
STATEMENT OF CHANGES IN EQUITY
Purpose and Function

• Traces differences in Equity Share Capital and Other Equity between two balance
sheets
• Acts as link between Statement of Profit and Loss and Balance Sheet
• Shows how profits/losses from P&L are utilized
• Final balances after adjustments appear on Balance Sheet

Key Reconciliation
Opening Balance + Changes during the year = Closing Balance

PRACTICAL EXAMPLES FROM DOCUMENT

1. Company TM (March 31, 2025)

• Total Assets: ₹65,420 crores

• Major Assets: Investments in subsidiaries (₹29,718 crores), PPE (₹11,551 crores)
• Total Equity: ₹33,442 crores
• Current Ratio Components: Current Assets ₹14,900 crores vs Current Liabilities
₹24,424 crores

2. TCS (March 31, 2025)

• Total Assets: ₹1,32,788 crores

• Strong Cash Position: ₹28,803 crores in investments, ₹44,392 crores in trade
receivables
• High Equity: ₹75,617 crores

3. Company TL (March 31, 2024)

• Total Assets: ₹1,730.11 crores

• Total Equity: ₹762.38 crores
• Comprehensive disclosure of all balance sheet components

4. Sobha Limited

• Special Operating Cycle: 5 years for real estate development projects

• Current assets/liabilities classified based on 5-year cycle instead of 12 months

5. SpiceJet (March 31, 2024)

• Negative Equity Example: Total equity of ₹(25,858.47) crores

• Shows accumulated losses exceeding share capital and reserves
KEY REGULATORY FRAMEWORK
Companies Act, 2013

• Schedule III prescribes balance sheet format

• Mandatory compliance for Indian companies
• Standardizes presentation and classification

Important Distinctions

Liability vs Provision vs Contingent Liability

• Liability: Definite obligation with known amount and timing

• Provision: Obligation with uncertain timing or amount but probable outflow
• Contingent Liability: Possible obligation dependent on future events

Current vs Non-Current Classification

• Primary Criterion: 12 months from balance sheet date

• Alternative Criterion: Operating cycle (if longer than 12 months)
• Liquidity Consideration: Current assets are more liquid

ANALYSIS IMPLICATIONS
Financial Health Indicators

1. Asset Quality: Mix of current vs non-current assets

2. Liquidity Position: Current assets vs current liabilities
3. Leverage: Total liabilities vs total equity
4. Capital Structure: Equity vs debt financing

Red Flags

1. Negative Equity: Accumulated losses exceeding capital

2. Poor Current Ratio: Inadequate current assets vs current liabilities
3. High Debt-to-Equity: Excessive leverage
4. Declining Asset Quality: Increasing provisions and impairments

Growth Indicators

1. Capital Work-in-Progress: Future capacity expansion

2. Intangible Assets Under Development: R&D investments
3. Investment in Subsidiaries: Business expansion
4. Retained Earnings Growth: Profitable operations
CONCLUSION
The Balance Sheet serves as a comprehensive snapshot of a company's financial position,
providing crucial insights into:

• Resource Allocation: How funds are deployed in various assets

• Financing Strategy: Sources of funds and capital structure
• Financial Stability: Ability to meet obligations
• Growth Prospects: Investments in future capabilities

Understanding balance sheet components and their classifications is essential for financial
analysis, investment decisions, and regulatory compliance.