Explanation of Items included in the Balance Sheet
From the horizontal proforma of the balance sheet it is clear that the balance sheet has got two sides:
I. Liabilities side, and II. Assets side.
I. Liabilities Side: Liabilities side of the balance sheetis normally divided into the following parts:
(i) Share Capital,
(ii) Reserves and Surplus,
(iii) Secured Loan,
(iv) Unsecured Loans,
(v) Current Liabilities and Provisions, and
(vi) Contingent Liabilities.
(i) Share Capital- Under this head, authorised share capital, issued share capital and called-up share capital will be shown separately. Apart from these, forfeited shares and calls-in-advance are also shown under this head. The authorised share capital is not included in the total of liabilities. Called up capital is shown in the balance sheet after deducting calls-in-arrears (unpaid calls) amount. Bonus shares and shares issued for other than cash shall be shown separately. Apart from these, redeemable preference shares.will be shown separately clearly stating the terms, conditions and date of redemption/conversion of preference shares.
(ii) Reserves and Surplus-Capital Reserve, General
Reserve, Capital Redemption Reserve, Securities Premium
Account, etc. are shown under this heading. Any addition or deduction from the reserves since the last balance sheet shall be disclosed. Surplus of profit and loss appropriationaccount shall be shown together with other reserves while deficit shall be shown as a deduction from reserve.
(iii) Secured Loans- Those loans which are secured by the guarantee of the company are shown under this head. Debentures, loans and advances from banks and subsidiary companies and other loans and advances are separately shown. The amount guaranteed by the company is also mentioned here.
Loans and advances to directors, secretary, managers etc. are shown separately. In case of redeemable or convertible debentures, the conditions of conversion and redemption along with the dates for conversion/redemption are also shown here.
(iv) Unsecured Loans- Loans which are due for payment for not more that one year as at the date of the balance sheet like fixed deposits, loans and advances from subsidiaries, short term loans and advances, etc. Loans from directors, managers, secretary, etc shall be shown separately.
(v) Current Liabilities and Provisions- This head is
divided into two parts i.e.
(a) current liabilities and
Current liabilities includes bills payable, sundry creditors, subsidiary companies, advance payments and unexpired discounts, unclaimed dividends, interest accrued on loans, etc and provisions includes provision for income tax, proposed dividend, provision for contingencies, provision for provident fund schemes, insurance, pension, etc.)
(vi) Contingent Liabilities- Contingent liabilities are shown as foot notes to the balance sheet and are not included in the total of the liabilities. These are not actual obligation but may arise only by the occurance or nonoccurance of one or more uncertain future events. It includes items likes claims against the company not acknowledged as debts, uncalled liability on shares partly paid-up, estimated amount of contracts remaining to be executed on capital accounts, etc.
II. Assets Side: Assets side of the balance sheet is normally divided into five parts:
(i) Fixed Assets,
(iii) Current Assets, Loans and Advances,
(iv) Miscellaneous Expenditures, and
(v) Profit & Loss A/c.
(i) Fixed Assets- Goodwill, land, building, plant, machinery, furniture, patent, trademarks, livestock’s, vehicles, etc. are shown under the heading of Fixed Assets. Increase in fixed -assets are added and decrease in fixed assets are deducted. Depreciation on each fixed asset is deducted and shown separately in the balance sheet.
(ii) Investments- Securities purchased to earn a return or for business purposes are shown under this head. Government and trust securities, shares, debentures, bonds, immovable properties are shown under investment. Normally investments are shown at their cost price, but market value of investments are also shown in the balance sheet.
(iii) Current Assets, Loans and Advances: This item is divided mainly in two parts:
(a) Current assets, and
(b) Loans and advances.
(a) Current Assets-Accrued interest, stores and spare parts, loose tools, stocks of raw material, work-in-progress and finished goods, sundry debtors, cash in hand and banknbalances are shown under current assets. The method of valuation of stock and work-in-progress should also be disclosed. Sundry debtors should be classified as good and fully secured and unsecured. Debtors considered doubtful should be shown separately and bad debts should be deducted from total debtors. Sundry debtors remaining outstanding for more than six months should be shown separately.
(b) Loans and Advances: Loans and advances in-
cludes advances and loans to subsidiaries and partnership firms, bills of exchange, advance to employees, suppliers and for capital expenditures. Loans and advances due by directors, secretary, managers shall be stated separately.
(iv) Miscellaneous Expenditure- All those expendi-
tures, which have not yet been amortized are shown under this head Preliminary expenses, brokerage, unadjusted development expenditures, underwriting commission on the issue of shares and debentures, etc. are shown under this head.
(v) Profit & Loss Account- If no reserves are avail-
able, debit balance of Profit & Loss A/c is shown at the assets side of the balance sheet.