An Apparatus called BALANCE SHEET

Well, we all are aware abt the SATYAM fiasco, a lot many of us are familiar with BALANCE SHEET as the financial instrument, a device to detect liquidity... a tool for defining financial position of a business...

Balance sheet is a statement of its wealth (assets) and what it owes to others (liabilities) at a particular point in time.

• The assets could be fixed assets like land, buildings, plant and machinery.
  
• They could be movables like cars or computers.
• They could also be liquid assets in the form of cash reserves or receivable payments due to the company from those it has sold goods to.

• Liabilities are anything the company has to pay to others.
  
• They would include payments due to its suppliers.
• Loans taken from others as well as interest due on those loans would also be part of the liabilities.
  
• What is owed to the shareholders would also fall in this category.

Construction:
Balance sheets present this information not explicitly under the heads assets and liabilities, but rather as a statement that gives sources of funds on top and application of funds below.

1. All sources of funds effectively constitute liabilities.
2. Share capital and reserves and surpluses form liabilities owed to the shareholder, while loans are liabilities towards others.
3. The application of funds segment is a listing of the assets, except for one entry, which is current liabilities and provisions.
   
4. The gross value of assets , minus the current liabilities, gives the figure for net current assets.

Net current assets must be equal to total figure at the end of the sources of funds segment. This also means that net assets and net liabilities are always equal, hence the term balance sheet.

Application of funds includes value of fixed assets, of current assets (like receivables or inventories ) as well as investment.

Entries in the balance sheet are explained in more detail in annexed schedules.

Use:

Balance sheet in itself cannot adequately tell us whether a company is in sound financial health or not.

We must also look at balance sheets for earlier years as well as profit and loss accounts of the company. This is because while a balance sheet presents the picture of the company’s finances at a particular point in time, the profit and loss account tells us how the company has performed over a period of time—a quarter, half-year or full year.

SATYAM has made us learn the basics before investing.. :-) :-(

Love it or hate, but this is the fact!!