Case breakdown: Movie Bawarchi
The scene that you just saw shows how an office colleague of Ramnath Sharma (played by A.K Hangal) is unable to tally the balance sheet.
Ramnath Sharma helps him by tallying the balance sheet and colleagues’ job is saved.
What is a Balance Sheet?
Balance sheet is the main financial statement of the company. It shows the financial position of the company. This is in terms of resources (assets) the company owns and what the company owes (liabilities). It also shows the money of the owner (shareholders’ equity). As the name suggests, balance sheet is supposed to be balanced. It follows the accounting equation:
Asset= Liabilities+ Stockholders’ equity
This equation forms the fundamental model for business valuation too. This statement is critical for business owners, lenders and creditors. If one understands how to read it, they can decipher the company’s position in the market. To tally a balance sheet one needs to tally and balance this equation.
Components of a Balance Sheet:
Assets in business are quite similar, they are divided into 2 sub heads:
- Fixed Assets/long- term assets
- Current assets.
Fixed Assets are long term in nature and cannot be converted into cash quickly. They could be furniture and fixtures, building & Property, machinery etc. These assets are also depreciated over time.
Current Assets are those that can be quickly converted into cash. Hence bank balance, cash in hand, accounts receivables, inventory etc are current assets.
Assets can be further classified as:
Something that can be touched is tangible, while something that can’t be touched is intangible. In accounts, Goodwill is a long term asset and is intangible in nature. It is generally shown on the assets side when company makes any merger or acquisition. Hence it is more like an advantage to the business’s reputation.
Liabilities are something that the business owes. It can be called a burden or a debt as it needs to be paid off. For example, to run my business I would need a loan from the bank, when a bank gives me a loan, the bank expects me to return the loan over a period of time with interest. It is a liability till the time it is fully paid back.
Liabilities are further divided into 3 parts:
- Current Liability
- Long-term liability
- Other Liabilities
Current liability means amount that needs to be paid within 1 years’ time while others that are to be paid after a year are classified as long-term liability.
Examples of current liability include accounts payable, interest payable, income tax payable, etc. Examples of long-term liabilities include long-term loans (more than a year), bonds payable, deferred revenue etc. Other liabilities include inter-company transactions such as borrowings.
Stockholders’ Equity (SE):
Stockholders’ equity means owners’ money. This statement shows changes in the stockholders’ equity over a period of time. Stockholders’ equity is divided into two parts contributed capital and retained earnings.
Contributed capital forms part of equity, it is generally contributed by the owner or the founder and it is also called Common stock.
Retained earnings are the amount of net income earned over the course of the company’s existence that was not distributed as dividends. (Think piggy bank, a small portion of your pocket money would go in this). Similarly from net income after dividend distribution, the portion that is left is retained in the business.
Balance Sheet Format:
Below is a balance sheet of Facebook:
As you can see, balance sheet is tallied as the accounting equation balances. For March 31, 2021 both sides balance equally with 1,63, 523.
Written by: Ms. Gitika Chandra