Balance Sheet - Marshalling of Assets/Liabilities - Horizontal/Vertical Forms : information derived

Balance Sheet - the information it provides

A Balance sheet is a position statement and it gives the information relating to the assets and liabilities of an organisation.

A typical balance sheet would look something like this. Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Liabilities Amount Assets Amount

Eq. Share Capital Pr. Share Capital Reserves and Surplus Capital Reserve General Reserve Share Premium Retained Earnings (P/L Appr) Other Reserves Long Term Loans Fixed Deposits Collected Debentures

Provisions for Taxation Provisions for Dividends Outstanding Expenses Pre received Incomes Unclaimed Dividends Sundry Creditors Bills Payable Bank Overdraft 35,00,000 12,00,000

6,00,000 12,00,000 3,50,000 43,50,000 4,00,000 54,00,000 16,00,000 24,00,000 3,00,000 4,00,000 5,00,000 2,00,000 20,000 13,00,000 12,00,000

5,00,000 Land Buildings

Goodwill

Plant and Machinery Furniture and Fittings Motor Vehicles Patents, Trade Marks, Copyrights Investments Stock of Raw Material Work in Progress Finished Goods Stock Prepaid Expenses Incomes Receivable Sundry Debtors Cash Bank Balance Loans and Advances Bills Receivable Deferred Revenue Expenditure Miscellaneous Expenses Discounts to be written off Accumulated Loss (P/L Appr a/c debit balance) 35,00,000 27,00,000 8,00,000

15,00,000 25,00,000 35,00,000 18,00,000 24,00,000 2,50,000 2,40,000 3,00,000 4,00,000 3,00,000 26,00,000 1,16,000

6,00,000 15,00,000 54,000 1,20,000 2,40,000

2,54,20,000

2,54,20,000

What does it contain In accounting point of view, the Balance Sheet is a statement of Real, Personal and Special Nominal account balances after closing the nominal accounts. These are balances that are carried forward to the subsequent accounting period.

 Special Nominal Accounts Special Nominal accounts are nominal accounts whose balances are carried over from one accounting period to another. This is a term we use for understanding purposes only. The information it provides The information that we can deduce from a balance sheet made out as above is limited. It gives us an idea of the various assets and liabilities relating to the organisation as on the date of the balance sheet.

Marshalling of Assets and Liabilities - for greater information

To give a better idea/understanding/information, the Balance Sheet items are arranged in a specific order.

Marshal Meaning = To arrange in a logical order; Make ready for action or use Synonyms = Assemble, Line up, Organise, Position, Collect, Gather together Marshalling of Assets and Liabilities The process of arranging the balance sheet items (assets and liabilities) in a specific order is what we call "Marshalling of Assets and Liabilities". There are two orders followed in Marshalling of Assets and Liabilities (a) Order of Liquidity and (b) Order of Permanence Order of Liquidity The most liquid asset (cash) is placed first and the least liquid asset (goodwill) is placed last. In case of liabilities the liability that has to be paid out at the earliest (bank overdraft) is placed first and the liability that has got the highest life time (capital) is placed last. Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Liabilities Bank Overdraft Amount Assets Amount

Bills Payable Sundry Creditors ... ... ... ... Pr. Share Capital Eq. Share Capital 12,00,000 13,00,000 ... ... ... ... 12,00,000 35,00,000 Bank Balance Bills Receivable Sundry Debtors ... ... Buildings Land Goodwill 1,160,000 Cash 5,00,000

15,00,000 26,00,000 ... ... 27,00,000 35,00,000 8,00,000 2,54,20,000 2,54,20,000

Assets - Liquidity Liquidity is the characteristic of an asset to get converted to cash. The faster an asset can be converted into cash, the more liquid it is.

Of all the assets we generally come across in balance sheets, We can consider Cash to be the highest liquid asset, since we need no time to convert cash into cash. Goodwill to be the least liquid asset, since it is attached to the orgnisation and can be realised only when the organisation is dissolved Liabilities - Payout Of all the liabilities we generally come across in the Balance Sheet, we consider Bank Overdraft to be the liability that has to be paid at the earliest, since it gets adjustment with every bank transaction carried on.

[Bank Overdraft indicates overdrawl in the regular bank account used by the organisation. Any payments received by the organisation when put in bank and any payments made by the organisation by cheque and collected by the payee will alter the balance due.] Capital to be the liability that has the highest life span, since it is paid out only after every other liability is paid out and paying out capital amounts to dissolving the organisation. Order of Permanence

This order is the reverse of the Order of Liquidity. Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Liabilities Amount Assets Amount

Eq. Share Capital Pr. Share Capital ... ... ... ... Sundry Creditors Bills Payable Bank Overdraft 35,00,000 12,00,000 ... ... ... ... 13,00,000 12,00,000 5,00,000 Land Buildings ... ... Sundry Debtors Goodwill

Bills Receivable Bank Balance Cash 8,00,000

35,00,000 27,00,000 ... ... 26,00,000 15,00,000

1,16,000 2,54,20,000 2,54,20,000

Assets The asset with the highest permanence (least liquid asset), Goodwill is placed first and the least permanence (highest liquid asset), Cash is placed last. Liabilities In case of liabilities the liability that has the highest life time (capital) is placed first and the liability that has to be paid out at the earliest (bank overdraft) is placed last. Arranging Assets and Liabilities as per Statutory Requirements Many a timesorganisations are required to present the financial statements in specified forms to meet statutory obligations. Presenting the Profit/Loss a/c and Balance Sheet in specified formats to the Registrar of Companies, to meet the obligations under the Companies Act; to the Income Tax Authorities to meet the obligations under the Income Tax Act are some such examples.

Normally we see the order of permanence being followed in these statements. Balance Sheet

The Indian Companies Act, 1956, requires the companies registered under it to submit their Balance Sheet in a Horizontal Format or in a Vertical Format as given in Schedule VI Part I of the Act.

Does Marshalling provide additional information?

Marshalling of assets and liabilities provides a systematic flow of information based a key characteristic, liquidity. Placing the assets and liabilities in such an order would enable the organisation to have a clear idea of the assets with respect to their life span.

Liquidity being one of the important factors for decision making in relation to assets and liabilities, such an arrangement would be useful without doubt.

However, this information in itself would not be sufficient for all types of analysis that can be made based on the data that the balance sheet provides.

There are statutory formats for presenting information, which may provide additional information.

Statutory Horizontal Form of Balance Sheet

Indian Companies Act, 1956. Schedule VI PART I Horizontal Form of Balance Sheet Balance Sheet of M/s Free Flow Fluids on 30th June 2007 Liabilities (Previous) (Current) Amount Amount Assets Amount

(Previous) (Current)

Amount

SHARE CAPITAL: [Note L: (a)] Authorised: x EQ. shares of Rs._ each y Pr. shares of Rs._ each

Issued: [Note L: (b)] a EQ. shares of Rs._ each b Pr. shares of Rs._ each

Subscribed Capital: [Note L: (c), G(c)] EQ - p shares of Rs._ each, Rs.__ called up EQ - q shares of Rs._ each, Rs.__ called up Pr - m shares of Rs._ each, Rs.__ called up

Of these : Shares allotted as fully paid-up A) Pursuant to a contract without payments being received in cash : EQ - k shares of Rs._ each Pr - h shares of Rs._ each B) By way of bonus shares : [Note L: (d)] EQ - r shares of Rs._ each Less : Calls in Arrears

By Managing Agents/Secretaries/Treasurers [Note L: (e)] By Directors By Others

Add : Forfeited Shares [Note L: (d)] (amount originally paid up.)

RESERVES and SURPLUS [Note L: (g), (h)] (1) Capital Reserves. (2) Capital Redemption Reserve. (3) Share Premium Account [Note G: (cc)] (4) Other reserves (specifying the nature of each Reserve and the amount in respect thereof.) Less : Debit balance in P/L a/c. [Note G: (h)] (5) Surplus bal in P/L a/c (after providing for Dividend, bonus, reserves etc.) (6) Proposed additions to reserves. (7) Sinking Funds

SECURED LOANS [Note L: (i), (j), (k), (l)] (1) Debentures [Note L: (l)] (2) Loans and advances from banks. (3) Loans and advances from subsidiaries.

(4) Other loans and advances.

UNSECURED LOANS (1) Fixed deposits. (2) Loans and advances from subsidiaries. [Note L: (m), (n), (o)] (3) Short-term loans and advances: [Note L: (m), (n), (o); G: (d)] (a) From Banks. (b) From others (4) Other loans and advances: (a) From Banks. (b) From others.

CURRENT LIABILITIES AND PROVISIONS : A. CURRENT LIABILITIES : [Note L: (p), (), () ] (1) Acceptances. (2) Sundry creditors. Total outstanding dues i) of small scale industrial undertaking(s); and ii) of other creditors (3) Subsidiary companies. (4) Advance payments and unexpired discounts for the portion for which value has still to be given e.g., in the case of the following

classes of companies :- Newspaper, Fire Insurance, theatres, clubs, banking, steamship companies, etc. (5) Unclaimed dividends. (6) Other liabilities (if any) (7) Interest accrued but not due on loans.

B. PROVISIONS (8) Provision for taxation. (9) Proposed dividends. (10) For contingencies. (11) For provident fund scheme. (12) For insurance, pension and similar staff benefit schemes. (13) Other provisions. (a) Goodwill (b) Land (c) Buildings (d) Leaseholds (e) Railway Sidings (f) Plant and Machinery (g) Furniture and Fittings (h) Development of Property (i) Patents, Trade Marks and Designs (j) Livestock FIXED ASSETS [Note A: (a), (b), (c), (d) ]

(k) Vehicles

INVESTMENTS : [Note A: (e), (f), (g)] (a) In Government or Trust Securities (b) In Shares [Note A: (h)] (c) In Debentures [Note A: (h)] (d) In Bonds [Note A: (h)] (e) In Immovable properties (f) In Capital of partnership firms (g) Balance of unutilised monies raised by issue

CURRENT ASSETS, LOANS AND ADVANCES: (A) CURRENT ASSETS (1) Interest accrued on Investments (2) Stores and spare parts [Note A: (i)] (3) Loose tools (4) Stock-in-trade [Note A: (i)] (5) Works-in-progress (6) Sundry debtors [Note A: (k)] (a) Debts outstanding for over six months. (b) Other debts. Less: Provision (7) Cash and Bank Balances (A) Cash balance on hand (B) Bank balances - [Note A: (l), (m)]

(a) with Scheduled banks (b) with others.

(B) LOANS AND ADVANCES [Note A: (k)] (8) Advances and Loans (i) To subsidiaries. (ii) To partnership firms (in which the company or any of its subsidiaries is a partner.) (9) Bills of Exchange. (10) Advances recoverable (in cash or in kind or for value to be received Eg : Rates, Taxes, Insurance, etc.) (11) Balances with customs, port trust, etc. (where payable on demand)

MISCLLANEOUS EXPENDITURE : (to the extent not written off or adjusted): (1) Preliminary expenses. (2) Expenses including commission or brokerage on underwriting or subscription of shares or debentures. (3) Discount allowed on the issue of shares or debentures. (4) Interest paid out of capital (with rate of interest)

during construction (5) Development expenditure not adjusted. (6) Other items

PROFIT AND LOSS ACCOUNT [Note A: (n)]

Footnotes A foot note to the balance-sheet may be added to show separately :(1) (2) (3) Claims against the company not acknowledged as debts. Uncalled liability on shares partly paid. Arrears of fixed cumulative dividends.

The period for which the dividends are in arrear or if there is more than one class of shares, the dividends on each such class are in arrear, shall be stated. (4) for. Estimated amount of contracts remaining to be executed on capital account and not provided

The amount shall be stated before deduction of income-tax, except that in the case of tax-free dividends the amount shall be shown free of income-tax and the fact that it is so shown shall be stated. (5) Other money for which the company is contingently liable.

The amount of any guarantees given by the company on behalf of directors or other officers of the company shall be stated and where practicable, the general nature and amount of each such contingent liability, if material, shall also be specified.

L Instructions in accordance with which liabilities should be made out Show/Hide A Instructions in accordance with which assets should be made out Show/Hide G General instructions for preparation of balance sheet Show/Hide

Statutory Vertical Form of Balance Sheet

Indian Companies Act, 1956. Schedule VI PART I Vertical Form of Balance Sheet Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Particulars No. Current Financial year Previous Schedule

Figures as at the end of

Financial year

I. SOURCE OF FUNDS (1) Shareholders' funds : (a) Capital (b) Reserves and surplus (2) Loan funds (a) Secured loans (b) Unsecured loans

TOTAL

II. APPLICATION OF FUNDS (1) Fixed assets : (a) Gross; block (b) Less : Depreciation (c) Net block (d) Capital work-in-progress (2) Investments (3) Current assets, loans and advances : (a) Inventories (b) Sundry debtors (c) Cash and bank balances (d) Other current assets (e) Loans and advances

Less : Current liabilities and provisions: (a) Liabilities (b) Provisions (4) (a) Miscellaneous expenditure to the extent not written off or adjusted (b) Profit and loss account

TOTAL

Notes1. Details under each of the above items shall be given in separate Schedules. The Schedules shall incorporate all the information required to be given under A-Horizontal Form read with notes containing general instructions for preparation of balance sheet. 2. The Schedules, referred to above, accounting policies and explanatory notes that may be attached shall form an integral part of the balance sheet. 3. The figures in the balance sheet may be rounded off to the nearest '000' or '00' as may be convenient or may be expressed in terms of decimals of thousands. 4. A footnote to the balance sheet may be added to show separately contingent liabilities.]

Are the Statutory Formats useful?

All the benefits derived by marshalling of assets and liabilities are derived by following the statutory format.

The presentation of the information relating to the previous period and the current period side by side would also enable the organisation to have a comparative overview of each of the items within the Balance Sheet. information not obtainable Though a better understanding (or derivation of information) is possible by marshalling of assets and liabilities or by following the statutory formats, there is a lot of other information that is needed by the organisation that is not obtained ready hand from the Balance Sheets.

Total value of the fixed assets, funds relating/belonging to the ownership, long term loans etc., employed in the business are some of the examples of such information. Such information to an extent is obtainable from the Vertical Format of balance Sheet.

Solution !! To enable derivation of such additional information, the information in the balance sheet is redrawn into a statement which is termed "Balance Sheet in a Form Suitable for Financial Analysis".

We would see if that statement provides all the information that is derived in Funds Flow analysis. Author Credit : The Edifier ... Continued Page 2

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