The business snapshot

Now that you've mastered the mysteries of the Profit & Loss Account, let's move on to the Balance Sheet. This gives you a picture of the size of the company's assets and liabilities, and the sources and uses of the company's funds

Unlike the P&L account, which shows the profit or loss a firm has incurred over a period of time, the balance sheet is a snapshot of the firm at A POINT OF TIME. As on a particular date, the last date of the accounting period, the assets and liabilities of the firm are all added up and presented in the balance sheet. The capital and reserves are added to the liabilities side to balance the two sides. In other words, Capital + Liabilities = Assets.

To illustrate, let us take the Balance Sheet of Reliance Industries.

	As at 31st March 1999		As at 31st March,1998
	Rs.	Rs.	Rs.	Rs.
SOURCES OF FUNDS :
Shareholders’ Funds
Share Capital - Equity	933.39		931.90
Share Capital - Preference	252.95		187.95
Reserves and Surplus	11,183.00		10,862.75
		12,369.34		11,982.60
Securitisation/Advance Against Future Recievables Loan Funds		965.02		300
Secured Loans	5,477.64		2,736.78
Unsecured Loans	5,207.65		5,510.55
		10,685.29		8,247.33
TOTAL		24,019.65		20,529.93

APPLICATION OF FUNDS:

Fixed Assets
Gross Block	18,650.33		17,848.33
Less:Depreciation	6,691.93		4,944.47
Net Block	11,958.40		12,903.86
Capital Work-in-Progress	3,437.83		2,069.43
		15,396.23		14,973.29
Investments		4,294.59		4,282.33
Current Assets, Loans and Advances
Current Assets
Interest Accrued on Investments	25.61		21.07
Inventories	1,408.61		1,343.96
Sundry Debtors	457.10		642.72
Cash and Bank Balances	4,897.60		2,133.51
	6,788.92		4,141.26
Loans and Advances	1,676.26		991.05
	8,465.18		5,132.31
Less: Current Liabilities and Provisions
Current Liabilities	3,591.98		3,382.01
Provisions	544.37		475.99
	4,136.35		3,858.00
Net Current Assets		4,328.83		1,274.31
TOTAL		24,091.65		20,529.93
Significant Accounting Policies
Notes on Accounts

You'll notice it's divided into two broad sections- Sources of Funds and Application of Funds.

Sources of funds

What are the sources of funds? Obviously share capital is one of them. In the Reliance balance sheet, there are two types of share capital-- equity and preference. Equity shares are ordinary shares. Preference shares, on the other hand, are so called because they get preferential treatment when it comes to paying dividend. Preference shareholders are paid a fixed dividend, unlike ordinary shareholders, whose dividends vary according to how well the company has performed.

However, preference shareholders, because they opt for the security of fixed dividend payments also forgo capital appreciation -their shares are typically redeemed at a fixed price (often no different what they paid for it).

Profits retained by the business over the years are also a source of funds. These are included under the head "Reserves and Surplus". Loans, secured and unsecured, constitute the other source of funds. Secured loans are those in which the lender has a charge on the company's assets as security, while unsecured loans are those where there is no security, for example fixed deposits from the public.

There's yet another source of funds. You'll find, towards the bottom of the balance sheet, an item called Current Liabilities and Provisions, which are deducted from Current Assets. Current Liabilities are things like Sundry Creditors, or those to whom the company owes money. In other words, you owe someone money, but you haven't paid him yet. So he becomes a source of funds.

The other item, Provisions, is a bit trickier. These are sums set aside but payments have not been made. In other words, you need to pay income tax, wealth tax, dividend, leave encashment etc, and make provisions for them, but because you haven't yet paid these sums, they become a source of funds.

Uses of funds

Now we come to the applications side of the balance sheet. Here we have the uses to which all those funds, which have been sourced, have been put. There are two broad classifications--fixed assets and current assets.

Fixed assets are things like plant and machinery. Total depreciation on these assets (see article on P&L account) is deducted from gross assets to arrive at net assets or net block. To that is added capital work-in-progress, that is, the projects going on at the balance sheet date. Investments in stocks or bonds are another way in which funds can be used. And lastly we have current assets, so called because they form part of the working capital cycle which transforms raw materials to finished goods. Current assets consist of inventory, people who owe the company (sundry debtors) and cash and bank balances. Loans and advances given to others is also a use for funds.

How do you use this information?

Now you have all this information about where the company has got its money from and how it has used it. But what use is it? You'll notice there are two columns in the balance sheet, with the previous year's figure also being given. Comparing the two sets of figures leads to some insights.

For instance, in the Reliance balance sheet, the amount of secured loans has gone up from Rs2736cr to Rs5477cr. How did it use this money? The balance sheet shows that part of it went towards increasing gross block, part towards the higher capital work-in-progress a bit on inventories and a large part was held in cash and bank balances. You can make a similar analysis for every source and use of funds, checking out how funds were sourced and how it was spent during the year. For instance, if a company siphons out money by giving loans to associate companies, the balance sheet will tell that to you.

A snapshot as on a particular date

One important caveat. The balance sheet is a snapshot, as on a particular date. For instance, if you had checked the balance sheet a few days earlier, the cash and bank balances may not have been so high. Or a company may have repaid a loan just for a few days to show lower indebtedness as on a particular date. Doing up the balance sheet in this fashion is known as window dressing. So now that you can read a balance sheet, keep a pinch of salt handy.