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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

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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

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5,00,000 Goodwill

Land

Buildings

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) 8,00,000

35,00,000

27,00,000

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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.

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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.



Bank Overdraft

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Bills Payable

Sundry Creditors

...

...

...

...

Pr. Share Capital

Eq. Share Capital 5,00,000

12,00,000

13,00,000

...

...

...

...

12,00,000

35,00,000 Cash

Bank Balance

Bills Receivable

Sundry Debtors

...

...

Buildings

Land

Goodwill 1,160,000

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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. Anypayments 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

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This order is the reverse of the Order of Liquidity.



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 Goodwill

Land

Buildings

...

...

Sundry Debtors

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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

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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 Amount

(Previous) Amount

(Current) Assets Amount

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(Previous) Amount

(Current)

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

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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.

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(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

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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. FIXED ASSETS [Note A: (a), (b), (c), (d) ]

(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

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(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)]

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(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)

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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) Claims against the company not acknowledged as debts.

(2) Uncalled liability on shares partly paid.

(3) 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) Estimated amount of contracts remaining to be executed on capital account and not provided

for.

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.

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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


Particulars Schedule

No. Figures as at the end of

Current

Financial

year Previous

Financial

year

I. SOURCE OF FUNDS

(1) Shareholders' funds :

(a) Capital

(b) Reserves and surplus

(2) Loan funds

(a) Secured loans

(b) Unsecured loans

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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

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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 theorganisation 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.

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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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