How to Understand the Balance Sheet Statement (Part 2) – Poonit Rathore

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How to Understand the Balance Sheet (Part 1) - Poonit Rathore
How to Understand the Balance Sheet (Part 1) & (Part 2) – Poonit Rathore

7.1 – Assets portion of the Balance Sheet

In the previous chapter, we looked at the liabilities side of the balance sheet. Now we will look at the second part of it i.e. the asset part. This part of the balance sheet tells us about every A set the company has ever taken in its entire life span. Assets of the company in simple language It is called an asset that can help the company earn income later. _ _ _

As you can see there are 2 types of assets shown here non-current assets and current assets. _ Underneath all of these are multiple line items and notes associated with them. _ _ _ We will look at each of these in turn.  

7.2 – Non-Current Asset (Fixed Asset)

As we learned in the previous chapter that non-current asset is that asset of the company which can benefit the company for more than 365 days i.e. more than one year. _ _ _ _ You must remember that asset means the property that helps the company financially. Benefit in a way

You can see that in the Non-Current Assets section, there is another section where Fixed Assets is written and under that also there are many line items. Here fixed asset means that asset of the company that cannot be sold easily or in exchange for which cash cannot be obtained easily. It consists of both tangible and non-tangible assets. Common examples of fixed assets are land, factories, machines, vehicles, buildings, etc. Many types of intangible assets are also considered fixed assets because they provide long-term benefits to the company. You will notice that there is only one note for each line item – the number 10. We will see this in detail further.

The figure below shows the Fixed Assets of Amara Raja Batteries Limited.

The first line item is Tangible Assets of Rs 619.8 crore. Remember that a tangible asset is an asset that exists in physical form, ie that which you can see or touch. Generally, it consists of factories, plants, machinery, cars, vehicles, buildings, etc.

The next line item is that of Intangible Assets valued at Rs.3.2 Crores. Remember that an intangible asset is an asset that has value but does not have a physical form. You cannot see or touch it. This usually consists of things like copyrights, trademarks, designs, and patents.

When we discussed the P&L statement, we came across depreciation. Depreciation is the method of spreading the cost of an asset over the period of its useful time. Over time, the value of the asset depreciates as its productive capacity i.e. its use also gradually decreases. This happens because either the asset becomes old or it wears out. This is called depreciation expense or depreciation expense. It is shown in the Profit and Loss Account and in the Balance Sheet.

 Every asset of the company must depreciate over time. Because of this approach, when a company takes an asset, it is called a gross block. After deducting depreciation from the gross block, we get the netblock.

Net block = Gross block – Accumulated depreciation

The thing to note here is that the word Accumulated has been used here with Depreciation. It states that the value of all the depreciation from the time of formation of the company to date has been added together.

 When we look at Tangible Assets of Rs.619.8 Crores and Intangible Assets of Rs.3.2 Crores together we must remember that the company has shown it as Net Block which is the Gross Block after deducting depreciation. Let’s look at Note 10 associated with Fixed Assets.

At the top of the note, you can see the Gross block, Depreciation/amortization, and Net block highlighted. Here I have highlighted the two numbers of Net Block which match the figures shown in the Balance Sheet.

 Now let’s look at some more details of this note. Under Tangible Assets, you can see every asset of the company.

For example, the company has also placed buildings under Tangible Assets. I have highlighted this part.

As on March 31, 2013 ( FY 13),  ARBL had quoted the value of the building as Rs 93.4 crore. In FY 14 , the company added Rs 85.8 crore to the cost of the building. It is shown as new construction done in this year. Apart from this, the company has shown a deduction of Rs 0.668 from the cost of the building this year. Thus the total value of the building this year is :

Last year’s building cost + this year’s added cost – this year’s deduction

93.4 + 85.8 – 0.668

= Rs 178.5 crore

This number was highlighted in blue in the picture above. Remember this is the gross block of the building. By deducting the accumulated depreciation from the gross block, we get the net block. In the picture below, I have highlighted the depreciation portion of the building.

As on 31 March 2013 ( FY 13), ARBL has shown a depreciation of Rs.17.2 crores. In this, he will have to add depreciation of 2.8 crores for FY 14 and also show a deduction of 0.376 crores. Thus the total depreciation for the year will be :

Last year’s depreciation + this year’s depreciation – this year’s deduction

= 17.2 + 2.8 – 0.376 = 19.736 crores

It is highlighted in red in the picture above.

So now we have a gross block of the building of 178.6 crores, a depreciation of 19.736 crores so we can calculate the netblock: 178.6 – 19.736 = 158.8 crores. It is highlighted in the picture below. 

The total netblock can be arrived at in a similar manner for each type of tangible and intangible asset.

The next 2 line items under Fixed Assets are Capital Work in  Progress ( CWIP ) and Intangible assets under development.

CWIP includes assets that are currently under construction, such as buildings under construction, new machinery that is being added, and other such items that are not ready at the time the balance sheet is prepared. In other words, it includes capital expenditure which has been spent but whose work has not been completed. This amount is shown in the netblock. You can see that ARBL has placed 144.3 cr in CWIP. Once the work is completed and the asset is put to use, the asset is classified as a tangible asset (under fixed asset) and removed from the CWIP.

The last line item is Intangible Assets Under Development, also like CWIP but consists of intangible assets. Like if a patent has been filed or a copyright has been filed or a brand is being developed. In the case of ARBL, this amount is very small 0.3 crores. By adding all these expenses, the fixed cost of the company is reached.

7.3 – Non -current assets (Other line items)

 Non-current assets include line items other than fixed assets. They are shown in this picture. 

There are certain non-current investments made by ARBL for the long term. This investment is 16.07 crores. These investments can be anything. Like buying shares of some companies, taking a minority stake in a company, debentures , investing in mutual funds, etc. Here is a picture of Note 11 which may help you to understand this.

The next line item is Long Term Loans and Advances. Which is 56.7 crore rupees. It is the loan or advance that the company has given to other companies of its group, to its employees, to the supplier, or to any vendor. 

The last line item in Non-Current Asset is Other Non-Current Asset, which is 0.122 Crore. It also includes miscellaneous long-term assets.

7.4 – Current Assets

Current assets of the company are those that the company can convert into cash immediately or very quickly and the company believes that these can be used within 365 days ie within a year. These assets are used by the company for its day-to-day operations and other business expenses.

Common examples of current assets are cash, cash equivalents, inventories, receivables, short-term loans, and advances, and many more debtors called sundry debtors. 

Take a look at ARBL ‘s current assets : 

The first line item in Current Assets is Inventory, which is Rs 335 crore. All the products made by the company, their raw materials, and other things come in inventory. It also includes those products which are also incompletely made or are not yet ready for sale. When the company produces, all the goods pass through many stages of production from raw materials or raw materials to finished goods. The goods held at these different stages also form part of the inventory. You can see a sample of this in Note 14 below.

As you can see, most of the inventory is showing in raw material or work-in-progress.

The next line item is – Trade Receivables or Accounts Receivables. This is the money that the company is yet to get from its distributors, customers, or other people. In the case of ARBL, this amount is Rs 452.77 crore. 

The next line item is –  Cash and Cash Equivalents ie cash and other things like cash. It is considered the most liquid asset of the company. Here cash means cash on hand and cash on demand. Cash equivalent means those short-term investments whose maturity is less than 3 months. This amount is 294.5 crores. This has been shown in detail in Note 16, you can see here that the company has kept money in many different accounts.

The next line item is Short -term loans and advances, that is, short-term loans given by the company to the people, and it is expected that their return will be done within 1 year i.e. within 365 days. . These include loans given to customers, suppliers or employees, advance tax payments ( income tax, wealth tax), etc. This amount is 211.9 crores.  Then comes the last line item on the asset side and in fact the last line item on the balance sheet –  it’s called other current assets. It is called other because it is not given much importance. This amount is Rs 4.3 crore. 

So now the total assets of the company are : 

Fixed Asset + Current Asset

= 840.831 + 1298.61 crores

= Rs 2139.441 crore, this amount is equal to the liability of the company. 

So we took a look at the asset side of the balance sheet and the entire balance sheet as a whole. Take a look at the balance sheet once again.

You can see that the balance sheet equation holds true in the balance sheet of ARBL.

Asset = Shareholders’ Fund Liability

Remember in the last few chapters we have learned about balance sheets and P&L statements. But we have not done analysis A: A on their figures so that we can know whether the figures are good or bad. We will discuss this in the chapter on the Analysis of Financial Ratios. 

In the next chapter, we will look at the final financial statement i.e. Cash Flow Statement. But before looking at that, we need to see how the balance sheet and p&l statement are connected.

7.5 – Linking P&L  Statement and Balance Sheet

Now we will see how the balance sheet and P&L statement are related. 

Take a look at this picture.

In the picture above you can see that on the left side are the line items that are usually in the P&L statement while on the right side are the line items that are usually in the balance sheet. You are aware of all these line items based on the information given in the previous chapters. Now we will see how these line items relate to each other.

First of all, let’s look at the income from sales i.e. Revenue from Sales. If a company sells some goods, then it has to incur some expenses for that. For example, the company has to advertise so that people get to know about its product. Due to this cash expenditure, there is a decrease in the cash available to the company. Apart from this, the company also gives some goods on credit, due to which the Accounts Receivables go up.

The company buys many types of goods including raw materials to make its product or products, which are called operating expenses. When a company incurs such expenses, two things happen, one, it buys raw materials which are often taken on credit, which increases the trade payables (accounts payable), and secondly, the level of inventory also changes. The cost of inventory will be lower or higher depending on how long the company needs to sell its goods.

When a company buys a tangible asset or creates an intangible asset by investing in something like brand building, the company spreads this expense over several years, which increases depreciation on the company’s balance sheet. Remember that the balance sheet is built on a flow basis, so this depreciation gets added to the balance sheet continuously year after year. That is why depreciation is called Accumulated Depreciation in the Balance Sheet.

Things that are included in other income or other income are – interest income, sale of the subsidiary company, rental income, etc. That’s why when the company makes any investment, other income is affected.

Whenever the company takes a loan (long-term or short-term), the company has to spend some money on it. This money spent is called finance cost or borrowing cost. That is why when the debt increases, the finance cost also increases, and when the debt decreases, the finance cost comes down.

 You should also remember that Profit After Tax – Profit After Tax ( PAT ) increases the shareholder equity of the company.

Main points of this chapter

  1. The assets portion of the balance sheet shows all the assets of the company.
  2. Company assets provide economic benefits to the company over their useful life. 
  3. Assets can be divided into two parts, non-current and current assets. 
  4. The useful life of a non-current asset is greater than 365 days or 12 months. 
  5. Current assets are those that the company can convert into cash immediately or very quickly and can be used within 365 days i.e. within a year. 
  6. As long as depreciation is not deducted from the cost of the asset, it is called a gross block.
  7. Net block = Gross block – Accumulated depreciation 
  8. The value of all the assets together should be equal to the value of all the liabilities. Only then the balance sheet is said to be balanced. 
  9. Balance sheet and P&L statement are related to each other in many ways


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Poonit Rathore
Poonit Rathore
My name is Poonit Rathore. I am a Blogger, Content-writer, and Freelancer. Currently, I am pursuing my CMA final from ICAI. I live in India.
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