Lesson 14 of 33 · Free
Contents
- 1 The Balance Sheet
- 1.1 What is the balance sheet?
- 1.2 The four-block structure
- 1.3 Worked example
- 1.4 Three ratios you can read off a balance sheet
- 1.5 Report form vs. account form
- 1.6 How investors read a balance sheet
- 1.7 Practice
- 1.8 Lesson recap
- 1.9 Practical Indian Application
- 1.10 Worked Example (in Rupees)
- 1.11 Frequently Asked Questions
- 1.12 Ratios Embedded in the Balance Sheet
The Balance Sheet
A snapshot of assets, liabilities, and equity. Plus three ratios any analyst checks first.
What is the balance sheet?
The balance sheet is a snapshot of the business on a specific date — usually the last day of the month, quarter, or year. It lists what the business owns (assets), what it owes (liabilities), and what’s left for the owners (equity). It’s just the accounting equation made into a formal statement.
The four-block structure
1. Current Assets
Assets the business expects to convert to cash within 12 months. Listed in order of liquidity (most liquid first):
- Cash & cash equivalents
- Short-term investments (T-bills, money-market funds)
- Accounts receivable (customers who owe you)
- Inventory
- Prepaid expenses (rent paid in advance, insurance)
2. Non-Current (Long-Term) Assets
- Property, plant & equipment (PP&E) — buildings, machinery, vehicles, computers. Shown net of accumulated depreciation.
- Intangibles — patents, trademarks, software, goodwill.
- Long-term investments
- Deferred tax assets
3. Liabilities
- Current liabilities (due within 12 months): accounts payable, short-term debt, accrued expenses (salaries, taxes), GST payable, unearned revenue.
- Non-current liabilities (due in more than 12 months): long-term debt, bonds payable, deferred tax liabilities.
4. Equity
- Share capital / paid-in capital — what owners or shareholders contributed.
- Retained earnings — accumulated net income that wasn’t paid out as dividends.
- Other reserves — revaluation, foreign-currency translation, etc.
Worked example
From the café numbers we’ve been building:
| Item | Amount (₹) |
|---|---|
| ASSETS | |
| Cash | 52,500 |
| Accounts receivable | 18,000 |
| Inventory | 26,000 |
| Equipment (net) | 40,000 |
| Total Assets | 1,36,500 |
| LIABILITIES | |
| Accounts payable | 14,500 |
| EQUITY | |
| Capital | 1,00,000 |
| Retained earnings | 22,000 |
| Total Liabilities + Equity | 1,36,500 |
Both sides equal ₹1,36,500. ✓ The equation holds.
Three ratios you can read off a balance sheet
- Current ratio = Current assets ÷ Current liabilities. Above 1 is healthy; above 2 is comfortable. Below 1 = cash crunch risk.
- Quick ratio (acid test) = (Current assets − Inventory) ÷ Current liabilities. Tougher version of the current ratio.
- Debt-to-equity = Total liabilities ÷ Total equity. Above 2 typically means heavy leverage; varies by industry.
Report form vs. account form
Report form — stacks assets on top, liabilities + equity below. Vertical layout, used in annual reports.
Account form — assets on the left, liabilities + equity on the right, side by side. Older format, still common in Indian schoolbooks and Tally.
- Depreciation reduces the book value of long-term assets — Equipment is shown net of accumulated depreciation. Covered in Lesson 9.
- Goodwill only appears if you acquired another business for more than its book value. You never “create” goodwill internally.
- Treasury stock (own shares bought back) reduces equity, not increases assets. Common beginner error.
How investors read a balance sheet
- Is the business liquid? Compare current assets to current liabilities.
- Is the business solvent? Total assets > Total liabilities (i.e., positive equity).
- How is it financed? Compare debt to equity.
- Is working capital healthy? (Current assets − Current liabilities). A negative working capital can be bad — or, like for Amazon, a sign of fantastic supplier terms.
Practice
Company has: Cash ₹3,00,000; AR ₹1,50,000; Inventory ₹2,00,000; Equipment ₹6,00,000 (less accumulated depreciation ₹1,00,000); AP ₹1,80,000; Long-term loan ₹4,00,000; Capital ₹5,00,000; Retained earnings ₹?
Answer: Total assets = 3,00,000 + 1,50,000 + 2,00,000 + (6,00,000 − 1,00,000) = ₹11,50,000. Liabilities = 1,80,000 + 4,00,000 = ₹5,80,000. Equity must = 11,50,000 − 5,80,000 = ₹5,70,000. Retained earnings = 5,70,000 − 5,00,000 = ₹70,000.
Lesson recap
- Balance sheet = snapshot of assets, liabilities, equity on a specific date.
- Current vs. non-current — 12-month rule.
- Listed in order of liquidity (assets) and maturity (liabilities).
- Retained earnings is the bridge from the income statement.
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Practical Indian Application
The Balance Sheet is a snapshot of what the company owns (assets), owes (liabilities) and what is left over for shareholders (equity) at a single date — usually the last day of the financial year. Schedule III of the Companies Act 2013 mandates that an Indian company’s balance sheet be split into Equity & Liabilities and Assets, each further sub-divided into current and non-current. Equity comprises Share Capital and Other Equity (or Reserves & Surplus under AS); Liabilities include long-term borrowings, deferred tax, lease liabilities, trade payables, provisions and short-term borrowings; Assets include PPE, intangibles, investments, inventories, trade receivables and cash. Listed firms publish balance sheets quarterly under SEBI LODR. The auditor performs procedures for existence, completeness, valuation and presentation of each line.
Worked Example (in Rupees)
Asian Paints (illustrative figures) FY26 balance sheet shows Equity ₹15,000 crore + Liabilities ₹10,000 crore = Assets ₹25,000 crore. Within Equity: Share Capital ₹100 crore + Other Equity ₹14,900 crore. Within Liabilities: Long-term Borrowings ₹2,500 crore, Trade Payables ₹4,000 crore, Other Current Liabilities ₹3,500 crore. Within Assets: PPE ₹6,000 crore, Inventories ₹5,000 crore, Trade Receivables ₹4,500 crore, Cash & Investments ₹9,500 crore. The balance sheet tells an analyst that Asian Paints has 38% of its assets in liquid form and only ₹2,500 crore of long-term debt against ₹15,000 crore equity — a debt-equity ratio of 0.17, indicating financial conservatism.
Frequently Asked Questions
Why must the balance sheet ‘balance’?
Because of the dual-aspect (double-entry) rule: every transaction has equal Dr and Cr effects, so total assets always equal total liabilities plus equity.
What is the difference between current and non-current items?
Current items are expected to be settled or converted to cash within 12 months of the reporting date or one operating cycle (whichever is longer). Non-current items are everything else.
Where do deferred tax assets and liabilities appear?
Under Non-current Assets and Non-current Liabilities respectively, governed by Ind AS 12 or AS 22.
Does the balance sheet show market value of assets?
Usually not — most assets are at historical cost less depreciation, unless Ind AS revaluation, fair-value or impairment provisions apply.
Ratios Embedded in the Balance Sheet
Every balance sheet tells a multi-dimensional story when its ratios are computed: Debt-Equity (long-term debt / equity), Current Ratio (current assets / current liabilities), Quick Ratio (excludes inventory from current assets), and Asset Turnover (revenue / total assets). A typical Indian listed FMCG company has Debt-Equity below 0.3, Current Ratio between 1.3-1.8, and Asset Turnover above 1.5x — these benchmarks help compare companies of different sizes.
Quick Drill: Pidilite balance sheet shows Total Assets ₹8,000 crore, Equity ₹6,800 crore, Long-term Debt ₹100 crore, Current Assets ₹3,500 crore, Current Liabilities ₹2,000 crore, Inventory ₹1,200 crore. Compute: Debt-Equity = 0.015 (almost debt-free), Current = 1.75, Quick = 1.15, Capital Adequacy of 85% (Equity/Total Assets). All metrics confirm conservative balance sheet management.
Schedule III disclosure ensures every Indian company presents the balance sheet in a comparable format, but the analysis lies in computing ratios and benchmarking. Practitioners build standardised ratio templates that auto-calculate as new balance sheets are pasted in — a 30-minute investment in a template saves hours of recurring analysis.