One of the first things that may be noticed in the balance sheet is that the assets are divided into four classes namely, Fixed assets, Miscellaneous assets, Current Assets and Intangibles and liabilities into three classes namely, Short Term Liabilities, Long Term Liabilities and Shareholder Equity.
What is the significance of this classification is indicated below.
(a) Current assets are those category of assets which are required for the purpose of resale and are converted into cash from time to time. These consist of stocks, work in progress, debtors etc.
In the above Balance Sheet, the sum of Rs. 17.90 lacs represents Current Assets.
(b) Fixed assets are those which are purchased not for resale but for purposes of producing, processing raw materials and stocks for sale. These consist of land, buildings, plants and other investments of a fixed nature.
In the above case, the sum of Rs. 15.98 lacs represents assets purchased not for resale and thus considered as Fixed Assets.
(c) Miscellaneous assets : These are slow moving assets, which are converted into cash slowly. These consist of loans and advances and miscellaneous investments etc. These are not items included in the preceding two groups and which are not of an intangible nature.
In the above case, the item of Rs. 0.21 lacs is slow moving and should be classified as Miscellaneous asset.
(d) Intangible assets are those that are not available for payment of debts. In the above case, the Debit balance in the profit and loss account Rs. 4.42 lacs is the amount of capital lost in operations and as such is an intangible asset. Other such assets are preliminary expenses, doubtful debts, bad debts, goodwill etc
LIABILITIES CLASSIFICATION
On the liabilities side, the classification may be made broadly as follows
(e) Company's own funds consisting of Paid-up capital and reserves. These are not outside liabilities
(f) Long term liabilities consist of term loans repayable over a period of one year. These may be secured or unsecured. In the above Balance Sheet, the sum of Rs. 1.72 lacs represents a long term liability
(g) Short term liabilities are those liabilities which are payable on demand and generally due and payable within one year. In the above case, an item of Rs. 12.14 lacs being repayable on demand is a current liability so also current liability of Rs. 7.70 lacs
The above completes the classification of assets and liabilities and after this classification any Balance Sheet may be cast in the following form
Liabilities
Proprietor's Capital and surplus (A)
Long term liabilities (B)
Current liabilities (C)
Mathematically, the Balance Sheet may be cast as under :-
A + B + C = D + E + F + G (1)
This is called the basic Balance Sheet equation and may also be expressed as follows :
(A-G) = (D-B) + (E-C) + F (2)
Assets
Fixed Assets (D)
Current Assets (E)
Miscellaneous Assets (F)
Intangible Assets (G)
The first equation represents the company's own funds (A), supplemented by long term borrowings (B) and short term borrowings (C) have been utilised to acquire fixed assets (D), current assets (E) and slow moving assets (F) and in the process has also lost capital (G).
The second equation (A-G) represents the net shareholder's funds now remaining in business, and from these funds have been invested viz., in (D - B) representing long term investments from long term resources and (E - C) indicating investment in current assets by using funds obtained from current liabilities, and lastly (F) indicating the quantum of investment in Miscellaneous assets
The above is the basic classification of assets and liabilities in any Balance Sheet for the purpose of analysis and indicates the degree of liquidity of the own funds of the enterprise
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