Balance Sheet - Non-Currrent Area - Current Area - Working Capital

Funds Flow Cash Flow • Balance Sheet Analysis • Study Notes •     ... 234 ...

Balance Sheet = Non-Current Area + Current Area

For the purpose of funds flow analysis, the Balance Sheet (both the assets side as well as the liabilities side) is considered to be made up of two areas.

For this purpose, classification of assets and liabilities is based on time i.e. the life span of the assets and liabilities. An example balance sheet with the two areas marked.

Balance Sheet of M/s Free Flow Fluids as on 30th June 2007
LiabilitiesAmountAssetsAmount
EQUITY SHARE CAPITAL
PREFERENCE SHARE CAPITAL
RESERVES
a) P/L Appropriation a/c
    (Retained Earnings)
b) Share Premium
c) Shares Forfeited
d) Capital Redemption Reserve
e) General Reserve
LONG TERM LIABILITIES
(1) Loans from Banks
(2) Debentures
(3) Fixed Deposits Collected
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
15,00,000
9,00,000

29,57,000

14,00,000
1,74,000
12,00,000
20,00,000

54,00,000
25,00,000
14,62,000

13,00,000
12,00,000
5,00,000
5,00,000
20,000
2,23,000
3,00,000
4,00,000 
FIXED ASSETS
Goodwill at cost
Land and Buildings
Plant and Machinery
Furniture and Fittings
Loose Tools
Patents, Trade Marks, Copyrights
Investments
ACCUMULATED LOSSES
Miscellaneous Expenses
Goodwill (Self Generated)
Patents, Trade Marks, Copyrights
    (unrealisable)
Discount on issue of
    shares and Debentures
CURRENT ASSETS
A. LIQUID ASSETS
(1) Cash balance on hand
(2) Bank Balance
(3) Bills Receivable
(4) Sundry Debtors
  Less: Reserve for
  Doubtful Debts
(5) Advances recoverable in cash
      or for value to be received
B. OTHER CURRENT ASSETS
(1) Stocks/Inventories
(2) Prepaid Expenses
(3) Incomes Receivable
(4) Short Term Investments

8,00,000
62,00,000
35,00,000
5,00,000
4,26,000
18,00,000
24,00,000

2,40,000
2,00,000
1,00,000


2,10,000



1,17,000
–
15,00,000
38,20,000


3,83,000


6,00,000
3,80,000
1,60,000
5,00,000 
 2,38,36,0002,38,36,000

Current Area

Assets which generally get liquidated and liabilities which generally get cleared within a time span of a year or less are classified as current natured and are identified as current assets and current liabilities respectively.

Thus, the current area of the balance sheet is made up of the current assets on the assets side and the current liabilities on the liabilities side.

Balance Sheet of M/s Free Flow Fluids as on 30th June 2007
LiabilitiesAmountAssetsAmount
...
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
...

13,00,000
12,00,000
5,00,000
5,00,000
20,000
2,23,000
3,00,000
4,00,000 
44,43,000  		...
CURRENT ASSETS
A. LIQUID ASSETS
(1) Cash balance on hand
(2) Bank Balance
(3) Bills Receivable
(4) Sundry Debtors
  Less: Reserve for
  Doubtful Debts
(5) Advances recoverable in cash
      or for value to be received
B. OTHER CURRENT ASSETS
(1) Stocks/Inventories
(2) Prepaid Expenses
(3) Incomes Receivable
(4) Short Term Investments
...



1,17,000
–
15,00,000
38,20,000


3,83,000


6,00,000
3,80,000
1,60,000
5,00,000
72,60,000 
 2,38,36,0002,38,36,000

Current Assets > Current Liabilities

In general, the aggregate value of current assets would be greater than the aggregate value of current liabilities. This is not a rule and need not be so always.

From the above balance sheet,

  • aggregate of Current Assets = 72,60,000
  • aggregate of Current Liabilities = 44,43,000

Non-Current Area

Assets which generally have a life span of more than one year and liabilities which generally get cleared over a long period of time (greater than one year) are classified as non-current natured and are identified as non-current assets and non-current liabilities respectively.

With a few exclusions, we can also say that assets other than current assets are non-current assets and liabilities other than current liabilities are non-current liabilities.

Thus, the non-current area of the balance sheet is made up of the non-current assets on the assets side and the non-current liabilities on the liabilities side.

Balance Sheet of M/s Free Flow Fluids as on 30th June 2007
LiabilitiesAmountAssetsAmount
EQUITY SHARE CAPITAL
PREFERENCE SHARE CAPITAL
RESERVES
a) P/L Appropriation a/c
    (Retained Earnings)
b) Share Premium
c) Shares Forfeited
d) Capital Redemption Reserve
e) General Reserve
LONG TERM LIABILITIES
(1) Loans from Banks
(2) Debentures
(3) Fixed Deposits Collected
...
15,00,000
9,00,000

29,57,000

14,00,000
1,74,000
12,00,000
20,00,000

54,00,000
25,00,000
14,62,000
1,93,93,000  ...
FIXED ASSETS
Goodwill at cost
Land and Buildings
Plant and Machinery
Furniture and Fittings
Loose Tools
Patents, Trade Marks, Copyrights
Investments
ACCUMULATED LOSSES
Miscellaneous Expenses
Goodwill (Self Generated)
Patents, Trade Marks, Copyrights
    (unrealisable)
Discount on issue of
    shares and Debentures
...

8,00,000
62,00,000
35,00,000
5,00,000
4,26,000
18,00,000
24,00,000

2,40,000
2,00,000
1,00,000


2,10,000
1,65,76,000  ...
 2,38,36,0002,38,36,000

Non-Current Liabilities > Non-Current Assets

In general, the aggregate value of non-current liabilities would be greater than the aggregate value of non-current assets. This is not a rule and need not be so always.

From the above balance sheet,

  • aggregate of Non-Current Assets = 1,65,76,000
  • aggregate of Non-Current Liabilities = 1,93,93,000

Working Capital : Residue of Current Area

Balance Sheet of M/s Free Flow Fluids as on 30th June 2007
LiabilitiesAmountAssetsAmount
...
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
...

13,00,000
12,00,000
5,00,000
5,00,000
20,000
2,23,000
3,00,000
4,00,000 
44,43,000  		...
CURRENT ASSETS
A. LIQUID ASSETS
(1) Cash balance on hand
(2) Bank Balance
(3) Bills Receivable
(4) Sundry Debtors
  Less: Reserve for
  Doubtful Debts
(5) Advances recoverable in cash
      or for value to be received
B. OTHER CURRENT ASSETS
(1) Stocks/Inventories
(2) Prepaid Expenses
(3) Incomes Receivable
(4) Short Term Investments
...



1,17,000
–
15,00,000
38,20,000


3,83,000


6,00,000
3,80,000
1,60,000
5,00,000
72,60,000 
 2,38,36,0002,38,36,000

Working Capital [= Current Assets - Current Liabilities/Provisions]

The difference between the aggregate values of the current assets and current liabilities is working capital.

From the above balance sheet,

Working Capital = Current Assets - Current Liabilities
= 72,60,000 - 44,43,000
= 28,17,000

A negative value for working capital indicates that the aggregate of current liabilities is greater than the aggregate of current assets.

Working Capital is excess of Current Assets over Current Liabilities.

Since, Working Capital = Current Assets - Current Liabilities, Working capital can be interpreted as the excess of current assets over current liabilities or as the residue of the current area (after setting of current assets and liabilities).

Working Capital is that part of the Current Assets which are not financed by Current Liabilities.

Every rupee of an asset is financed by a rupee of a liability. We match similar natured assets and liabilities as far as possible.

Assuming current assets > current liabilities, all Current assets cannot be financed by current liabilities. Current assets in excess of current liabilities (i.e. current assets which are not capable of being financed by current liabilities) are financed by non-current liabilities.

Since Current assets in excess of current liabilities is working capital, we say
Working capital is

  • financed by non-current liabilities
  • that part of current assets which are financed by non-current liabilities.
  • not financed by current liabilities
  • that part of current assets which are not financed by current liabilities.

Working Capital : Residue of Non-Current Area

Balance Sheet of M/s Free Flow Fluids as on 30th June 2007
LiabilitiesAmountAssetsAmount
EQUITY SHARE CAPITAL
PREFERENCE SHARE CAPITAL
RESERVES
a) P/L Appropriation a/c
    (Retained Earnings)
b) Share Premium
c) Shares Forfeited
d) Capital Redemption Reserve
e) General Reserve
LONG TERM LIABILITIES
(1) Loans from Banks
(2) Debentures
(3) Fixed Deposits Collected
...
15,00,000
9,00,000

29,57,000

14,00,000
1,74,000
12,00,000
20,00,000

54,00,000
25,00,000
14,62,000
1,93,93,000  ...
FIXED ASSETS
Goodwill at cost
Land and Buildings
Plant and Machinery
Furniture and Fittings
Loose Tools
Patents, Trade Marks, Copyrights
Investments
ACCUMULATED LOSSES
Miscellaneous Expenses
Goodwill (Self Generated)
Patents, Trade Marks, Copyrights
    (unrealisable)
Discount on issue of
    shares and Debentures
...

8,00,000
62,00,000
35,00,000
5,00,000
4,26,000
18,00,000
24,00,000

2,40,000
2,00,000
1,00,000


2,10,000
1,65,76,000  ...
 2,38,36,0002,38,36,000

Working Capital = Non-Current Liabilities - Non-Current Assets

Total Assets = Total Liabilities
⇒ Non-Current Assets + Current Assets = Non-Current Liabilities + Current Liabilities
⇒ Current Assets - Current Liabilities = Non-Current Liabilities - Non-Current Assets
⇒ Working Capital = Fund (Non-Current) Liabilities - Fund (Non-Current) Assets

The difference between the aggregate values of non-current liabilities and non-current assets is working capital.

From the above balance sheet,

Working Capital = Non-Current Liabilities - Non-Current Assets
= 1,93,93,000 - 1,65,76,000
= 28,17,000

A negative value for working capital indicates that the aggregate of non-current assets is greater than the aggregate of non-current liabilities.

Working Capital is excess of non-current liabilities over non-current assets

Since, Working Capital = Non-Current Liabilities - Non-Current Assets, Working capital is the residue of the non-current area (after setting of non-current assets and liabilities).

Working Capital is that part of current assets financed by non-current liabilities

Every rupee of an asset is financed by a rupee of a liability. We match similar natured assets and liabilities as far as possible.

Assuming current assets > current liabilities, all Current assets cannot be financed by current liabilities. Current assets in excess of current liabilities (i.e. current assets which are not capable of being financed by current liabilities) are financed by non-current liabilities.

Since Current assets in excess of current liabilities is working capital, we say
Working capital is

  • financed by non-current liabilities
  • that part of current assets which are financed by non-current liabilities.
  • not financed by current liabilities
  • that part of current assets which are not financed by current liabilities.

Working Capital is that part of non-current liabilities supported by current assets

Every rupee of a liability supports a rupee of an asset. We match similar natured assets and liabilities as far as possible.

Assuming non-current liabilities > non-current assets, Non-Current liabilities support non-current assets to the extent they are available and only the surplus non-current liabilities support current assets.

Since non-Current liabilities in excess of non-current assets represent working capital, we say
Working capital is

  • that part of non-current liabilities supported by current assets
  • that part of non-current liabilities not supported by non-current assets

Working Capital belongs to both Current area as well as Non - Current area

Working Capital as a residue of the Current area leads us to the understanding that it is current natured. Excess of current assets over current liabilities implies a part of the current assets is what is remaining and thus it can be said that working capital is current natured.

Working capital as a residue of the Non-Current area leads us to the understanding that it is Non-Current natured. Excess of Non-Current liabilities over Non-Current assets implies part of the Non-Current liabilities (capital) is what is remaining and thus it can be said that working capital is Non-Current natured.

Working capital is thus dual natured. It is also capital and in this regard it is to be considered as long term capital belonging to the non-current area. Every rupee of a liability is supported by a rupee of an asset and the assets that support working capital are current natured.

... 234 ...
Disclaimer ♣ Privacy Policy ♣ Terms of Service♣ Who We Are
Site optimized for IE 7, FF 2 and above. ♣ ♣ Copyright © Krishbhavara - 2024