Balance Sheet in a form suitable for Financial Analysis

To enable derivation of 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".

Balance Sheet of M/s Free Flow Fluids as on 30th June 2007
Particulars	Amount (Previous)	Amount (Current)
I. LIQUID ASSETS (1) Cash balance on hand (2) Bank balance (3) Bills Receivable (4) Sundry debtors Less: Reserve for Doubtful Debts Previous Period = 27,30,000 - 2,12,000 Current Period = 26,00,000 - 1,80,000 (5) Advances recoverable in cash or for value to be received	86,000 40,000 13,80,000 25,18,000 3,25,000	1,16,000 – 15,00,000 24,20,000 3,83,000
TOTAL	43,49,000	44,19,000
II. CURRENT ASSETS (1) Liquid Assets (2) Stocks/Inventories (3) Prepaid Expenses (4) Incomes Receivable (5) Short Term Investments	43,49,000 25,30,000 2,45,000 1,80,000 3,00,000	44,19,000 28,90,000 3,80,000 1,60,000 5,00,000
TOTAL	76,04,000	83,49,000
III. CURRENT LIABILITIES and PROVISIONS (1) Sundry Creditors (2) Bills Payable (3) Bank Overdraft (4) Outstanding Expenses (5) Unclaimed dividends. (6) Pre-received Incomes (7) Provision for Taxation (8) Provision for Dividends	13,50,000 15,20,000 – 6,00,000 24,000 1,98,000 3,40,000 3,80,000	13,00,000 12,00,000 5,00,000 5,00,000 20,000 2,23,000 3,00,000 4,00,000
TOTAL	44,12,000	44,25,000
IV. NET WORKING CAPITAL [II - III] Current Assets - Current Liabilities and Provisions	28,92,000	39,24,000
V. FIXED ASSETS (1) Goodwill at Cost (2) Land and Buildings (3) Plant and Machinery (4) Furniture and Fittings (5) Loose Tools (6) Patents, Trademarks, Copyrights (7) Investments	8,00,000 65,75,000 18,00,000 6,00,000 5,37,000 19,45,000 17,59,000	8,00,000 62,00,000 15,00,000 5,00,000 4,26,000 18,00,000 24,00,000
TOTAL	1,40,16,000	1,36,26,000
VI. CAPITAL EMPLOYED [IV + V] Net Working Capital + Fixed Assets	1,84,28,000	1,80,51,000
VII. OTHER ASSETS (1) Investments not relating to business (2) Advances to Directors	2,00,000 1,75,000	2,80,000 1,62,000
TOTAL	3,75,000	4,42,000
VII. NET ASSETS [VI + VII] Capital Employed + Other Assets	1,88,03,000	1,84,93,000
VIII. LONG TERM LIABILITIES (1) Loans from Banks (2) Debentures (3) Fixed Deposits Collected	62,00,000 25,00,000 11,75,000	54,00,000 25,00,000 14,62,000
TOTAL	98,75,000	93,62,000
IX. SHAREHOLDERS NET WORTH (Or) TOTAL TANGIBLE NET WORTH [VII - VIII] Net Assets - Long Term Liabilities	89,28,000	91,31,000
X. PREFERENCE SHARE CAPITAL	12,00,000	12,00,000
XI. EQUITY SHAREHOLDERS NET WORTH [IX - X] Shareholders Net Worth - Preference Share Capital	77,28,000	79,31,000

All assets which are capable of being liquidated in a short period of time (typically a few i.e. 1 or 2 months time) are considered to be liquid assets.

Cash balance, Bank balance, Bills Receivable, Recoverable Advances, Sundry debtors etc are some examples of liquid assets.

Liquid assets requiring special attention.

Sundry Debtors

In measuring/analysing funds flow, based on the concept of conservatism, assets are considered at their net values after setting off all losses of which there is information. Reserve for bad and doubtful debts and reserve for discounts on debtors are not actual losses. They are profits kept aside to confront losses in the subsequent accounting period.

These reserves are set off from the balance in sundry debtors account to ascertain the net figure of Sundry Debtors. This net figure is considered for the purpose of Funds flow analysis.

Advances

Assets representing advances which are recoverable in the near future (short period) in cash or any other value are only to be considered as liquid assets. These do not include prepaid expenses since they are not recovered in cash but are written off as expenses in the future.

Journal in the books of ___ for the period from ___ to ___
Date	R/V No.	Particulars		L/F	Amount
Date	R/V No.	Particulars		L/F	Debit	Credit
31-12 2009	-	Cash/Bank a/c To Loans and Advances a/c	Dr.	- -	5,000	5,000
31-12 2009	-	[For the amount received from Mr. Chang, towards the installment recovering the festival advance.]		- -	5,000	5,000
31-12 2009	-	Rent a/c To Pre-paid Rent a/c	Dr.	- -	5,000	5,000
31-12 2009	-	[For writing off the pre-paid rent as expense.]		- -	5,000	5,000

All those assets which are capable of being liquidated within a reasonable period of time (typically a year or less) are considered to be current assets. Since Liquid Assets can also be liquidated within this time span, they also form part of Current Assets.

Thus
Current Assets = Liquid Assets + Current Assets other than Liquid Assets.

Cash balance, Bank balance, Bills Receivable, Sundry debtors, Recoverable Advances, etc., which are all liquid assets along with other current assets like Stocks/Inventories, Prepaid expenses, Incomes receivable etc., form some examples for current assets.

The following other Current Assets require special attention

Prepaid Expenses

Prepaid expenses which are not recoverable in cash but are capable of being set off as expenses in the future, are made part of current assets other than liquid assets.

Stock/Inventories

Stocks/Inventories generally form a significant portion of other current assets. In the absence of any other information, we assume that current assets other than liquid assets are made up of stocks/inventories.

Current Assets - Liquid Assets = Stock/Inventories

Current Assets	=	Liquid Assets + Current Assets other than Liquid Assets.
	=	Liquid Assets + Stock/Inventories.

⇒ Stock/Inventories = Current Assets - Liquid Assets

This relationship is useful in problem solving.

Current Assets = Liquid Assets

In the absence of current assets other than liquid assets, current assets should be equal to liquid assets.

Current Assets	=	Liquid Assets + Current Assets other than Liquid Assets.
	=	Liquid Assets + 0
	=	Liquid Assets

Liabilities which are to be cleared within a short period of time (typically a year or less) are considered to be current liabilities.

The following other Current Assets require special attention

Reserve/Provision for Taxation/Dividends

Certain liability side items like Reserve/Provision for Taxation, Reserve/Provision for Dividends, etc., have dual nature. They can be considered to be a part of :

Current Liabilities

They may be treated as being part of Current Liabilities, indicating an existing liability.

Reserve/Provision for Taxation
⇒ Taxes are due but have not been paid yet.
Reserve/Provision for Dividends
⇒ Dividends have been declared and provided for but have not been paid yet.

Non - Current Liabilities

They may be treated as part of Reserves (Non-Current Liabilities), indicating that they represent profits set aside.

Reserve/Provision for Taxation
⇒ Certain amount of profits are set aside for Taxes.
Reserve/Provision for Dividends
⇒ Certain amount of profits are set aside for Dividends.

The Tax or Dividend is not yet an ascertained liability and the profit is being set aside to meet the expenditure which may/would arise in the future.

How Possible?

The possibility to treat these items in a dual manner arises on account of the fact that the net effect of the journal entries for (a) recording creation of reserves and (b) recording outstanding expenses is the same.

Recording Outstanding Expenses

Where the Expenditure account has already been closed and the outstanding expenses are recorded thereon, the journal and ledger would be as follows.

Journal in the books of ___ for the period from ___ to ___
Date	R/V No.	Particulars		L/F	Amount
Date	R/V No.	Particulars		L/F	Debit	Credit
31-12 2009	-	Expenses a/c To Outstanding Expenses a/c	Dr.	- -	8,000	8,000
31-12 2009	-	[For the amount of outstanding expenses brought into the books of accounts.]		- -	8,000	8,000
31-12 2009	-	Profit and Loss a/c To Expenses a/c	Dr.	- -	8,000	8,000
31-12 2009	-	[For charging the profit and loss account with the outstanding expenditure.]		- -	8,000	8,000

Recording outstanding expenses results in the expenditure being taken into account in the relevant/current accounting period.

Ledgers Show

Dr	Expenditure a/c	Cr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
../../09 ../../09 ../../09 31/12/09	To ... To ... To ... To Outstanding Expenses a/c	— — — —	... ... ... 8,000	31/12/09 31/12/09	By Profit and Loss a/c By Profit and Loss a/c	—	2,40,000 8,000
			2,48,000				2,48,000

Dr	Outstanding Expenditure a/c	Cr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
31/12/09	To Balance c/d	—	8,000	31/12/09	By Expenditure a/c	—	8,000
			8,000				8,000
				01/01/10	By Balance b/d	—	8,000

Net Effect

The net effect of the above two entries for recording outstanding expenses would be a charge against the current period profits and the creation of a liability (Outstanding Expenses a/c)

Journal in the books of ___ for the period from ___ to ___
Date	R/V No.	Particulars		L/F	Amount
Date	R/V No.	Particulars		L/F	Debit	Credit
31-12 2009	-	Profit and Loss a/c To Outstanding Expenses a/c	Dr.	- -	8,000	8,000
31-12 2009	-	[For the charging the profit and loss account with the outstanding expenses.]		- -	8,000	8,000

All nominal accounts prefixed or suffixed by the terms prepaid, outstanding, pre-recieved, still payable etc represent personal accounts and would be an equivalent of either debtors or creditors depending on the nature of their balance and have to be treated accordingly. Accounts with debit balances (≡ Debtors) are shown on the assets side of the balance sheet and accounts with credit balances (≡ Creditors) are shown on the liabilities side of the balance sheet.

Where the Expenditure account has not yet been closed and the outstanding expenses are recorded before transferring the balance therein to the profit and loss account, the journal and ledger would be as follows : Show

Journal in the books of ___ for the period from ___ to ___
Date	R/V No.	Particulars	L/F	Amount
Debit	Credit
31-12 2009	-	Expenses a/c To Outstanding Expenses a/c	Dr.	- -	8,000	8,000
[For the amount of outstanding expenses brought into the books of accounts.]
31-12 2009	-	Profit and Loss a/c To Expenses a/c	Dr.	- -	2,48,000	2,48,000
[For charging the profit and loss account with the expenditure.]

Dr	Expenditure a/c	Cr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
../../09 ../../09 ../../09 31/12/09	To ... To ... To ... To Outstanding Expenses a/c	— — — —	... ... ... 8,000	31/12/09	By Profit and Loss a/c	—	2,48,000
			2,48,000				2,48,000

Dr	Outstanding Expenditure a/c	Cr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
31/12/09	To Balance c/d	—	8,000	31/12/09	By Expenditure a/c	—	8,000
			8,000				8,000
				01/01/10	By Balance b/d	—	8,000

Creating a Reserve

Reserves should be understood as profits kept aside for some purpose.

Accounts showing profits (say profit and loss account) show a credit balance. Transferring a credit balance from one account to another would result in the transferee account being credited and the transferor account being debited. This amounts to taking a credit balance from one account and placing it in another account.

This is what we do in creating reserves. Though, reserves are also created by charging profits, they are an appropriation of profits and not a charge on profits.

Journal in the books of ___ for the period from ___ to ___
Date	R/V No.	Particulars		L/F	Amount
Date	R/V No.	Particulars		L/F	Debit	Credit
31-12 2009	-	Profit and Loss a/c To Reserve a/c	Dr.	- -	25,000	25,000
31-12 2009	-	[For the amount of reserve created out of profits.]		- -	25,000	25,000

Unlike in the case of the recording outstanding expenditure, the second account affected in the transaction of creating a reserve does not indicate a liability that has to be paid out.

Difference

Both recording an outstanding expenditure and creating a reserve result in a charge on profits. Both will result in a reduction of available profits. However, the effect on the second account is not the same.

Recording an outstanding expenditure would result in creation of an existing liability, which is generally treated as a current liability. Whereas creating a reserve would result in a reserve account (special nominal account) which is treated as a non-current liability.

Balance Sheet of M/s Free Flow Fluids as on 31^st December 2009
Liabilities	Amount	Assets	Amount
Capital ... Reserve ... ... ... Sundry Creditors Outstanding Expenses ...	5,00,000 ... 25,000 ... ... ... 1,10,000 8,000 ...	Plant and Machinery	4,25,000

Outstanding Expenses a/c which represents a liability goes into the Current area and the Reserve a/c which represents an appropriation of profit goes into the non-current area of the liabilities side of the balance sheet.

An account that appears in the

current area
represents an account that has been created through a charge on profits.
non-current area
represents an account that has been created through an appropriation of profits.

Thus, if Reserve/Provision for Taxation/Dividend is treated as

a current liability
(included in current liabilities), it represents an expenditure charged to the profit and loss account.
a non-current liability
(included in non-current liabilities), it represents an appropriation of profit.

All assets other than Current Assets are generally included under the head Fixed Assets. There may be other assets which sometimes are not to be considered as part of fixed assets for the purpose of funds flow analysis.

Accumulated Losses

Items present on the assets side of the Balance Sheet which do not represent assets, like accumulated losses, miscellaneous expenses, discount on issue of shares/debentures to the extent not written off etc., are not to be included in the value of Fixed Assets.

Intangible Assets

Intangible assets like Goodwill should be included in fixed assets only if they have been purchased (or expenditure has been incurred on their acquisition).

Intangible assets like patents, trade marks, copyrights etc., should be included in fixed assets only if they have some realisable value.

Assets to be taken at their Net Values

Assets should be considered at their Net Values (values remaining after setting off depreciation). If asset values are being maintained at their cost i.e. depreciation reserve account exists in relation to any asset, then the cost and the reserve are to be set off and only the net value is to be considered as the value of the asset.

Assets are those entities which are capable of being converted to cash or at least into any other asset. The items on the Assets side of the balance sheet, which do not possess this characteristic should not be included in the value of Fixed Assets.

Some such asset side items

Profit and Loss Appropriation a/c (debit balance)
Preliminary Expenses
Discount on issue of Shares/Debentures to the extent not written off
Miscellaneous Expenses

Deferred Revenue Expenditure

Meaning

Postponed until a future date;
Withheld until a future date.

Synonyms

Late
Delayed
Postponed
Overdue

Deferred revenue expenditure is an expenditure that has already been incurred but whose charge (all or some proportion of the expenditure) to the profit and loss account is being postponed to the future accounting periods.

The value of the expenditure whose charge is being deferred can be treated as both an accumulated loss or as an asset. There are arguments for and against both these treatments. The decision as to under what head this should go is to be taken by the management. Based on that decision, it would be included under the appropriate head in the "Balance Sheet" for the purpose of analysing funds flow.

Where there is no indication as to its treatment, one can choose either of the treatments indicating the choice taken up.

Balance Sheet in a form suitable for Financial Analysis