Traditional balance sheet

Earlier, the balance sheet was only known for recording the assets and liabilities of the organization, but now the scope, framework, and trend of preparing a balance sheet have changed.

Framework and its purpose

The purpose of the framework is to:

1. Assist in the development of future IFRS and reviewing existing IFRS.
2. Assist preparers of balance sheet and financial statement in applying IFRS as per the trend specified.
3. Assist users of the balance sheet, profits and loss statement, cash flow statement, and other financial statements in interpreting the information contained in financial statements.
4. Providing help with proper implementation of the trend, regulatory, accounting standard, and procedure specified for presenting the financial statements by providing appropriate accounting treatment as the IFRS permits.

Measurement of the elements of the balance sheet

1. Historical cost: It means acquisition price.
2. Current cost: It gives an alternative measurement basis. Assets or liabilities are carried out at such amount of cash or equivalent, to cash that would have to be paid if the same obligation is settled currently.
3. Realizable value: As per realizable value, assets are carried as the amount of cash or cash equivalents that could currently be obtained by selling the assets in an orderly disposal.
4. Present value: Under the present value convention, assets or liabilities are carried at the present value of future net cash flows generated or expected to be required to settle by the concerned assets or liabilities respectively in the normal course of business.

Explanation of balance sheet items

Share Capital

For each class of share capital (different class of preference shares to be treated separately):

(a) Authorized share capital - It is the number and amount of shares authorized at the time of incorporation.

(b) Issue and subscribed capital - It is the number of equity as well as preference shares issued, subscribed and fully paid, and subscribed but not fully paid.

(c) Holding Company - Shares in respect of each class in the company held by its holding company or its ultimate holding company, including equity shares held by the subsidiaries or associates of the holding company or the holding company in aggregate.

(d) Forfeited capital - Forfeited equity and preference shares (amount originally paid up).

Reserves and surplus

1. Classification of reserves and surplus:

• Capital reserve
• Revaluation reserve
• Securities premium reserves
• Share option outstanding account
• Capital redemption reserve

2. Additions and deductions – Since the last balance sheet date, all addition and deductions are shown under each specified head.

3. Profit and Loss balance - The negative balance of the profit and loss account is to be shown under the "surplus" head as a negative figure.

Non-current liabilities

(a) Long-term borrowings: These contain various amounts that the organization has borrowed and is obligated to pay in the future. These contain bonds, loans borrowed from banks and other parties, deferred payments, deposits, loans and advances from related parties, other loans, and advances. These are further sub-classified as secured and unsecured, shown separately in each case.

(b) Other long-term liabilities: Classified as trade payables and other liability.

(c) Long-term provisions: Classified as provision for employee benefits and others (specifying nature).

Current liabilities

(a) Short-term borrowings: These are funds that are borrowed for a period that is less than twelve months, i.e., one year. These could be the amount taken from banks and other financial institutions or other related parties for a short term to fulfill the organization's short-term needs.

(b) Other Current Liabilities: Classification of obligations to be paid immediately, financial lease obligations that need to be met immediately, an accrued interest which is not due yet, interest accrued as well as due on borrowings.

(c) Short-term provisions: Short-term provisions shall be classified into provisions for team member benefits and others, specifying nature.

These are used along with the organization's current assets to determine the current ratio of the company.

Non-current assets

(a) Fixed assets

1. Tangible assets: These include assets that can be seen and touched and are used to generate economic profits.
   • Tangible assets shall be classified into the land, building, plant and equipment, furniture and fixtures, vehicles, office equipment, others (specifying nature).
   • Assets under the lease shall be shown separately under each class of asset.
   • It shows asset value at the beginning of the year with adjustments showing additions, disposals, additions due to acquisitions, other adjustments, depreciation, impairment loss/reversal.
   • A capital reduction scheme or a revaluation of assets has taken place. Every balance sheet after the reduction or revaluation shall show the reduced/increased figures.
2. Intangible assets: Intangible assets shall be classified into goodwill, brands/trademarks, computer software, publishing titles, mining rights, copyrights and patents, and other intellectual property rights, services, and operating rights.
   • It would be mentioned with the opening balances showing long with any addition or deletions done during the year and also any adjustments made due to depreciation and impairment.
   • All adjustments made due to capital reduction or revaluation specifying the date as well as the reduced amount.
3. Capital work in progress: Capital work in progress (CWIP) refers to the cost incurred on fixed assets that are still in construction. The cost incurred on a fixed asset that is still under construction would fall under this category. For instance, the cost incurred on the office is still under construction.
4. Intangible Assets Under Development: An intangible asset that arises during its development phase is categorized as an intangible asset under development.

(b) Non-current investments

1. These include trade and financial investments, investments in property, equity instruments, preference shares, government or trust securities, debentures or bonds, mutual funds, partnership firms, others (specifying nature).
2. In case of investments in bodies corporate, a few additional disclosures shall be required, such as the name of the body corporate, nature and extent of the investments, partly paid investments to be separately shown.
3. Investments carried at other costs are to be separately shown specifying the basis of valuation.
4. Book value of both quoted and unquoted investments, specifying all the additions and deletions made.

(c) Long-term loans and advances

Loans and advances shall be classified into security deposits, loans, and advances from related parties. These are further sub-classified into secured and unsecured.

(d) Other non-current assets

Long-term trade receivables, loans, and advances are due from directors or other officers of the company.

Current assets

(a) Current Investments

1. Investments in property, equity instruments, preference shares, government or trust securities, debentures or bonds, mutual funds, partnership firms, others (specifying nature) are all mentioned under current investments.
2. In the case of investment in body corporate, a few additional disclosures shall be required.
3. Any other additional disclosures as required in the statement should be disclosed.

(b) Inventories

Classification of inventories into raw materials, work in progress, finished goods, stores, spares, loose tools, etc. The mode of valuation is to be stated separately.

(c) Trade receivables

1. The aggregate amount of outstanding trade receivables exceeding six months is shown separately.
2. Sub-classification of trade receivables.

(d) Cash and cash equivalents

1. Classifying cash and cash equivalents into balance with the bank, cheques, drafts on hand, cash on hand.
2. Earmarked balances with the bank, balances with the bank, repatriation restrictions, bank deposits.

(e) Short term loans and advances

Short-term loans and advances are categorized as current assets as these refer to the funds lent by the organization for a period of one year or less.

(f) Other current assets

Other current assets refer to other sources of the company's income generation or things that benefit the company.

Contingent liability and commitments

The following shall be disclosed:

1. Classification of contingent liability:
   • Claims against the company
   • Guarantees
   • Other contingent liability
2. Commitment shall be classified as:
   • The estimated amount of contracts not executed on capital account
   • Other commitments
3. Bills discounted/endorsed.

Context and Applications

This topic is significant in graduate and professional exams, especially for:

• Bachelor of Commerce
• Masters in Commerce
• Chartered Accountancy
• Companies Secretary
• Certified Public accountants

Practice Problems

Common Mistakes

Students often mistake in learning the main heads. Focusing on basic rules and ignoring measurement rules is a big mistake usually made by the students. Further, students should also learn the classification of items.

Related Concepts

While studying the above topic, it is recommended to read the following topics to get a better knowledge: e

• Profit and loss statement
• Cash flow statement
• Statement of change in equity