Balance sheet
It would be a balance sheet in nature that represents the major indicator of the financial status of the business, worldwide, especially in India. It will portray the immediate picture of the financial standing of the business at any point through displaying the summary of the assets, liabilities, and owner’s equity.
Needless to say, an entrepreneur or an accountant or a businessman needs to know essentially the art of preparing a balance sheet. This is a step-by-step guide to preparing a balance sheet in India. The article describes several features and how the accounting standard practices of India affect this compilation.
1. What is a Balance Sheet?
A balance sheet is a statement of the financial position of a company at a given time. It follows the basic accounting equation:
Assets = Liabilities + Owner’s Equity
This balances a company, hence good financial standing. These include such assets, claims against those resources such as liabilities, and owners’ equity of a company.
The preparation of a balance sheet by any Indian entity follows the classical rules designed by the Institute of Chartered Accountants of India, Ind AS-nearly identical with IFRS. So, one should be familiar with these rules to draft a balance sheet under the business entity which operates in India.
2. Balance Sheet Elements
A balance sheet India is broadly categorized into three main types
- Assets
Assets include everything that the company owned and could be utilized by generating income. Assets also have two categories: Current Assets: These are very short-term assets that they are expected to be converting into cash or consumed inside one year.
Non-Current Assets (Long-Term Assets): Those assets which the company is going to carry for over a year
2. Liabilities
Liabilities or debts which the company has to liquidate in the long term can be considered as a liability. They are divided into
Current Liabilities: Short-term loans or debt to be paid back within a period of one year
Non-Current Liabilities (Long-Term Liabilities): Obligations to be paid back after completing one year
3. Owner’s Equity
Owner’s Equity, or Shareholders’ Equity for corporations, is the residual interest in the assets after deducting all liabilities. This chapter comprises of:
Paid-Up Capital: The owners initial investment.
Retained Earnings: The profits are retained in the business as opposed to being paid as dividends.
Reserves and Surplus: Funds held by the company for various purposes such as expansion to meet future unexpected needs.
3. Accounting Standards in India
It obligates Indian businesses to comply with it, inasmuch as its adoption reflects International Financial Reporting Standards or IFRS, meaning that its adoption obliges companies to produce their respective financial statements regularly and consecutively and with appropriate disclosure.
example:
Ind AS Presentation of Financial Statements deals on how a firm should state its balance sheets and disclosing the information thereon.
Accounting standards, AS are simple, developed by ICAI, as compared to Ind AS, but are not less complex than the principles of financial accounting. Companies listed at stock exchanges, major corporations, and other public entities fall in the category of Ind AS whereas other smaller companies and private enterprise have a usage of IGAAP except when otherwise regulated by the authority.
4. Balance Sheet
Balance Sheet step-by-step process. We take you through the process step-by-step and ensure that you are also conversant with the structure and rules of accounts followed in India.
Step 1: List Your Assets
Assets are those things belonging to the business. They may be classified into two heads-current and non-current.
1. Current Assets
Those are probably either to be spent in cash or are going to be used next year. One does not really feel odd to think of those:
Cash and Cash Equivalents comprises cash bank balances and some short investments.
Accounts Receivable has some amount receivable from customers related to the purchase of certain products or services.
It is inclusive of the products that are either to be sold later or are to be processed for the final product.
Prepaid expenses: advance payment of some services to be provided at a later date, insurances, rent and all that.
Example:
| Current Asset | Value |
|---|---|
| Cash and Cash Equivalents | ₹50,000 |
| Accounts Receivable | ₹30,000 |
| Inventory | ₹20,000 |
| Prepaid Expenses | ₹5,000 |
| Total Current Assets | ₹105,000 |
2. Non-Current Assets
These include long-term assets which the company would hold more than one year. These include:
Property, Plant and Equipment (PPE), that are; Buildings, Machines, office machines.
Intangible Assets such as; Patents trademarks, Goodwill, amongst others
Long term Investments including; that to be invested for more than one year from the date of making investments.
Example:
| Non-Current Asset | Value |
|---|---|
| Property, Plant & Equipment | ₹300,000 |
| Intangible Assets | ₹25,000 |
| Long-Term Investments | ₹50,000 |
| Total Non-Current Assets | ₹375,000 |
3. Net Assets
Net Assets=Current Assets +Non-Current Assets=₹105,000+₹375,000=₹480,000
Step 2: Liabilities Identification
Liabilities are the debts or due of the company. Liability is of two types.
1. Current liabilities
Those that are supposed to settle in one year. Take for example the following :
Accounts Payable: How much suppliers are owed.
Loans due within a year: Which are due to be repaid within a year.
Example:
| Current Liability | Value |
|---|---|
| Accounts Payable | ₹20,000 |
| Short-Term Loans | ₹15,000 |
| Accrued Expenses | ₹5,000 |
| Total Current Liabilities | ₹40,000 |
- Non-Current Liabilities:
These are liabilities that are payable after more than a year.
Examples include:
Long-term Loans : Loans or debts taken that are meant to be returned after a lot longer than a year.
Bonds Payable : Securities, long-term debt issued by the business
| Non-Current Liability | Value |
|---|
| Long-Term Loans | ₹100,000 |
| Bonds Payable | ₹50,000 |
| Total Non-Current Liabilities | ₹150,000 |
3. Total Liabilities
To get the sum total of total liabilities add current to it alongside non-current liability.
Total Liabilities=Current Liabilities + Non-Current Liabilities=₹40,000+₹150,000=₹190,000
Step 3: Calculate Owner’s Equity
Owner’s Equity means liabilities the of equity the of capital the company. which most Simply, equity important has it include: elements been is Earnings: of provided also Paid-Up These owner’s by defined Capital: are to equity the as That the they include: Some owners the is profits shareholders of after ownership the which in the subtracting interest amount have form set most all of that been of aside important owners. the owners reinvested dividends. for elements or in Reserves future of Some shareholders the and enlargement owner’s Surplus: have or business The contributed for rather total Retained any than amount other being which purpose distributed has that been may arise in the future.
Example:
| Owner’s Equity Component | Value |
|---|---|
| Paid-Up Capital | ₹150,000 |
| Retained Earnings | ₹130,000 |
| Reserves and Surplus | ₹10,000 |
| Total Owner’s Equity | ₹290,000 |
Step 4: Balance sheet
You need to create a balanced sheet of assets and liabilities such that the assets are equal to the sum of liabilities and owner’s equity
Formula
Total Assets=Total Liabilities + Owner’s Equity=
₹480,000=₹190,000+₹290,000
One can see how the balance sheet balances and how the accounting equation still holds good.
5. Sample Balance Sheet
Here’s what a complete balance sheet might look like:
Balance Sheet as of 31st March 2024
Assets
- Current Assets
- Cash and Cash Equivalents: ₹50,000
- Accounts Receivable: ₹30,000
- Inventory: ₹20,000
- Prepaid Expenses: ₹5,000
- Total Current Assets: ₹105,000
- Non-Current Assets
- Property, Plant & Equipment: ₹300,000
- Intangible Assets: ₹25,000
- Long-Term Investments: ₹50,000
- Total Non-Current Assets: ₹375,000
- Total Assets: ₹480,000
Liabilities
- Current Liabilities
- Accounts Payable: ₹20,000
- Short-Term Loans: ₹15,000
- Accrued Expenses: ₹5,000
- Total Current Liabilities: ₹40,000
- Non-Current Liabilities
- Long-Term Loans: ₹100,000
- Bonds Payable: ₹50,000
- Total Non-Current Liabilities: ₹150,000
- Total Liabilities: ₹190,000
Owner’s Equity
- Paid-Up Capital: ₹150,000
- Retained Earnings: ₹130,000
- Reserves and Surplus: ₹10,000
- Total Owner’s Equity: ₹290,000
Total Liabilities and Owner’s Equity: ₹480,000
Summary
Two principles form the basis of a company’s balance sheet: It presents the position of a firm’s net worth at any given moment and which part of the same are assets and which liabilities, and observe how a company’s net worth belongs to the owner.
The formula for the enclosed document: Assets= Liabilities + Owner’s Equity. This strict compliance with the Indian Accounting Standards, Ind AS, ensures that very accurate reports will be processed. The structure of the balance sheet further drives apart the current and non-current categories under which are placed assets and liabilities. It lets the financial health of a company be known and, per the laws put forward for Indian companies, must be complied with.
Frequently Asked Question
1. What is a balance sheet?
A balance sheet is one of the most essential financial statements, which mentions the status of a firm from its aspect of finance. All assets, liabilities, and owners’ capital of the company are written on the basis of that date.
2. What is the asset and what is a liability?
Asset – things possessed by the company (cash, property, inventory)
Liability- obligations by the firm (loan, account payable).
3. What is owners equity?
That part of the value that the company owns after its assets minus liabilities, belongs to shareholders or owners.
4. Why is a balance sheet required?
It makes it possible for a business owner, investor, and creditor to determine the company’s financial position so intelligent actions can be carried out.
5. Does India have some special conditions for the balance sheet?
According to Indian Accounting Standards, Ind AS requires that balance sheets be prepared to maintain consistency and accuracy in financial reporting for Indian companies.