A balance sheet is a document which is a summary of the financial balances of an individual or organisation, whether it be a sole proprietorship, a business partnership, a corporation, private limited company or other organization such as Government or not-for-profit entity.
- A balance sheet is often described as a “snapshot of a company’s financial condition”, which shows the financial position of a company at a particular point of time.
- The Balance Sheet is a hugely important report and is divided into three main segments – assets (often divided into current assets and fixed assets), liabilities and shareholder equity or retained earnings.
Components of a balance sheet:
- Equity / Ratio
- Assets at present: These are assets that may be converted into cash, sold or consumed within a year or less. Current Assets include cash, marketable securities, Account and notes receivables, inventories etc.
- Fixed: Fixed assets are those tangible physical facilities owned by an enterprise, which are permanent/durable in nature. Fixed assets are not turned over, meaning they are not converted into cash. For example: Land and building, machinery, tools, equipments etc.
- Intangible: These assets do not exist in physical form but are notional possessions owned by an enterprise. These assets generally don’t have real money value but are important for a company. For example: patents, goodwill, trade-mark etc.
- Current liabilities: Those obligations of a company which are payable on demand or within a period of less than 1 year from the date of the balance sheet.
- Term Liabilities: A term liability is a debt which matures after a period of 12 months from the date of the balance sheet.
- Net Worth: The net worth of a company is the owner’s stake in the business. It is a liability of a company towards its promoters. It is therefore an important item on the balance sheet onwhich a lending banker can rely.
- Specific Reserves and Provisions: Specific Reserves and Provisions are created for the payment of taxes, dividends and other contingencies.
Ratios with respect to Liquidity:
- Current Ratio – Ratio of current assets to current liabilities.
- Quick Ratio – It is an index of the solvency of an enterprise. Basically quick ratio is the ratio of (Current assets-inventories) and current liabilities.
Ratio with respect to Financial Stability:
- Debt-Equity Ratio – This ratio indicates the relative proportion of shareholders’ equity and debt usedto finance a company’s assets.
Ratios with respect to Profitability:
- Return on investment ratio– This ratio measures the operating efficiency of a companywithout regards to financial structure.
- Return on Equity Ratio– It is the ratio of net income of a business during a period to itsstockholders’ equity during that period.
CAPITALS AND RESERVES:
- Capital and reserves is the difference between total assets and total liabilities in the balance sheet. It represents the equity interest of the owners in an entity and is the amount available to absorb unidentified losses.
- Shareholder equity or retained earnings (known as capital and reserves in KashFlow) is also known as the ‘book value’, and is the difference between assets and liabilities;
- It represents what’s left after all of a company’s debts have been paid off. It’s also a pretty good reflection of how strong a company is financially.
FOREIGN EXCHANGE RESERVES:
- Foreign-exchange reserves (also called forex reserves or FX reserves) is money or other assets held by a central bank or other monetary authority so that it can pay if need be its liabilities, such as the currency issued by the central bank, as well as the various bank reserves deposited with the central bank by the government and other financial institutions.
- In other words, Foreign exchange reserves are reserve assets held by a central bank in foreign currencies, used to back liabilities on their own issued currency as well as to influence monetary policy.
- Reserves are held in one or more reserve currency, mostly the United States dollar and to a lesser extent the Japanese yen.