Date :- 25-May-2008
Attendees : 195 (dropped to 192 during the later stages :))
Session Summary :- Balance Sheet, Assets, Liabilities, Personal Example, Types of Assets, Types of Liabilities, Owner’s Equity, Class Questions, Balance Sheet Exercise (8 Step Problem), Split up of Owner’s Equity, Standard Format/Vertical Format, Formulations between Asset/Liability/OE
Misc on a lighter vein :- Maa (Asset), Pet me Laath (On book download) 🙂
Balance Sheet (Class Defn) – Position Statement at a point in time. Statement of what you Own vs Owe.
Kapil’s case (Fellow Student) – Asset, Liability, OE build up.
ASSETS = LIABILITY + OWNER’S EQUITY
Owner’s Equity is also known as Book value worth or Residual Value as it is residual in nature.
Types of Business Transactions (Pertaining to the above equation)
- Asset Increases, Cash Decreases – E.g. Usage of Cash to buy an Asset (e.g. Buy a Computer paying Cash)
- Asset Increases, Liability Increases – E.g. Take a loan to buy an Asset
- Asset Decreases, Liability Decreases – E.g. Pay a loan using Cash
- Asset Increases, No change in Liability – OE Increases and vice verca
Assets are classified into
- Current Assets :- Cash, Checks at hand, Bank balances, Marketable Securities, Trade receivables, Inventory, Employee Loans/Advances
- Fixed Assets :- Land, Plant/Machinery, Vehicles, Computers/Fixtures/Furniture, Buildings
- Other Assets :- Long Term Investments – 5/10 Yr timeframe, Intangibles (Deferred Revenue Expenditure, Loyalties)
In a few cases a Fixed asset can be a current asset. e.g. Furniture for a Furniture Maker, Car for a Car Dealer.
Liabilities are classified into
- Current Liability :- Working Capital Loan, Supplier Credit, Accounts Payable, Salary (Till it is paid), Other Payables, Advances from Customers, Overdrafts
- Long Term Liability :- Loans from Investors, Equipment Credit, Unsecured Loans, Pensions/Gratuities
Owner’s Equity – (Asset – Liabilities), still reported under Liabilities as it is owed to Owners, Share holders
- Share Capital/Initial Capital
- Reserves/Surplus – Post the first yr of operations, the amount/profit accrued less the Initial Capital
Reserves are classified into 1. Retained Earnings (General, Investments, Dividend etc) 2. Capital Reserves – 1 Time Event (Selling an Asset, e.g. Finolex Industries selling its land in Chinchwad, Pune as a 1 time event and recorded in the Balance Sheet as a Capital Reserve)
Class Questions and Answers
1. What is a Deferred Revenue Expenditure? Can we have some examples?
Deferred Revenue Expenditure is a classification of Asset, though it is an expenditure incurred by the Enterprise to create a long term value for the company. Examples include 1. Advertisements for a new product launch 2. VRS Scheme offered by companies 3. Listing cost (Brokerage, Underwriting costs)
Added Masala :- In case, the DRE does not pay out in the long run (for e.g. the Product being launched is pulled off, it will be written off the balance sheet)
2. Can you give us an example of a case where the Liability increases and the OE reduces with the Asset being retained as is?
For e.g A fine incurred during an accident. Till the cash is paid, L decreases, once the cash is paid, Asset reduces bringing the OE down.
3. Convention to be followed while writing a balance sheet?
A|L or L|A
Purely a convention. Former is US based, while the later is UK based.
We will follow A|L, and a few other conventions followed are
1. List assets from more liquid to less liquid – Current, Fixed and Other in that Order
2. List liabilities from more liquid to less liquid – Current, Limited and OE in that order
Class Exercise – 8 Step Transaction building up the balance sheet.
Other Notes – Sundry Creditors (Accounts Payable), Sundry Debtors (Accounts Receivable)
Some Formulae
Working Capital/Net Current Assets = CA – CL (Current Asset – Liability)
WC + FA + OA = LTL + OE
CA + FA + OA = LL + CL +(SC + RE)
First month of business
CA + FA + OA = LL + CL + (SC + (SALES – EXPENSES))
Further Months
CA + FA + OA = LL + CL + (SC + RE + (SALES – EXPENSES))
Pls do the assignments as requested by the Professor and be ready for next week.
Happy Tallying the balance sheet!
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