Liquid Assets

All those assets which are capable of being liquidated in a short period of time (typically a few i.e. 1/2 months) are considered to be liquid assets. » Sundry Debtors The Sundry Debtors are considered at their net value i.e. at a figure that would be remaining after setting off the Reserve for Bad Debts and Reserve for Discounts on Debtors. » Advances Only those advances which are recoverable in cash and that too in the near future (short period) are 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.

Current Assets

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 liquidates within this time span, they also form part of Current Assets. Thus Current Assets = Liquid Assets + Current Assets other than Liquid Assets. » Prepaid Expenses Since prepaid expenses are not recovered in cash but are written off as expenses in the future, they are considered to be a part of Current Assets other than Liquid Assets. » Stock - Inventories We assume "Other Current Assets = Stocks/Inventories", where information relating to no "Other Current Assets" is available. 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 for finding out the missing information,

Current Liabilities and Provisions

Liabilities which are to be cleared within a short period of time (typically a year or less) are considered to be current liabilities. • Reserve for Taxation/Dividends Certain liability side items like Reserve for Taxation, Reserve for Dividends, etc., are capable of being treated either as Current Liabilities or as a part of Reserves (Non-Current). » as Current Liabilities They may be treated as part of Current Liabilities, thereby accepting that they indicate liabilities. This would amount to saying that a provision is being made for an expenditure which is outstanding. » as Reserves (Non-Current Liabilities) They may be treated as part of Reserves (Non-Current Liabilities) thereby indicating that they are not being treated as existing liabilities. This would amount to saying that a provision is being made for an expenditure which may/would arise in the future. » How is this possible ? This possibility arises on account of the fact that the net effect of the journal entries for recording creation of reserves and recording outstanding expenses is the same. Recording Outstanding Recording Charge Net Effect/Combined Entry Creating a General Reserve Dr. Expenses a/c Cr. Outstanding Expenses a/c Dr. Profit and Loss a/c Cr. Expenses a/c Dr. Profit and Loss a/c Cr. Outstanding Expenses a/c Dr. Profit and Loss a/c Cr. General Reserve a/c

Fixed Assets

• Assets to be taken at their Net Values All assets other than Current Assets are included under the head Fixed Assets. These should be considered at their Net Values (value remaining after setting off depreciations). 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. • 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 only if they have some realisable value.

Accumulated Losses

One characteristic of an asset is its convertibility into another asset. They are capable of being converted to cash or any other asset. The items on the Assets side of the balance sheet, which do not pocess 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 Deferred 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 (some proportion) 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 in a Form suitable for Financial Analysis". Where there is no indication as to its treatment, one can choose either of the treatments indicating the choice taken up.

Every rupee of a Liability is Supported by a rupee of an Asset

Consider the following Balance Sheet with Balance Sheet of M/s Free Flow Fluids as on 30th June 2007 Liabilities Amount Assets Amount 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/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 8,00,000 1,74,000 12,00,000 10,00,000 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 (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 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 ACCUMULATED LOSSES 1) Miscellaneous Expenses 2) Goodwill (self-generated) 3) Patents, Trademarks, Copyrights (unrealisable) 4) Discount on Issue of Shares/Debentures 8,00,000 62,00,000 35,00,000 5,00,000 4,26,000 18,00,000 24,00,000 1,17,000 – 15,00,000 38,20,000 3,83,000 6,00,000 3,80,000 1,60,000 5,00,000 2,40,000 2,00,000 1,00,000 2,10,000   2,23,36,000   2,23,36,000 • Liabilities supported by Assets Total Liabilities = Total Assets, indicates that Every rupee of a liability is supported by a rupee of an asset. Generally, which asset belongs to which liability is something that is not specified. There is no one to one correlation between liabilities and assets unless there is a specific indication regarding the same. » Assets belong to Loaned Capital The liabilities side is segregated into two parts as Capital and Liabilities. This is for the reason that the real liabilities to the organisation are the liabilities due to the outsiders (what we call loaned capital). In accounting terms owner is alien to business. However, in legal terms the owner and the business are one and the same and as such the amount due to them is called owned capital. Going by the legality, the assets are to be applied for clearing the dues to the outsiders and only after they are cleared the owned capital can be repaid. Therefore we can say that assets belong to the loaned capital. » Assets belong to Liabilities that have a Charge on them Pledging an asset to a liability is what we call creating a charge on the asset. If a liability has a charge on an asset, then the realistion from the asset is to be applied for discharging that specific liability and anything that remains can be applied for discharging other liabilities. » Funds and Fund Assets There may be certain instances when special reserves (called funds) are created out of profits and assets belonging to them are specifically set aside in the form of Fund Assets. In such cases, the Fund Assets belong to the Funds. • Assets Financed by Liabilities Total Assets = Total Liabilities, indicates that Every rupee of an asset is financed by a rupee of liability. Generally, which asset is financed by which liability is something that is not specified. There is no one to one correlation between liabilities and assets unless there is a specific indication regarding the same. » Valueless Assets financed by Owned Capital The idea that assets are financed by liabilities is a corollary to the idea liabilities are supported by assets. An asset is assumed to be functioning as a security to a liability, whereby we can assume that the liability may be cleared by disposing the asset. Where the asset itself has no value there is no meaning in thinking that it acts as a security to a liability. That is the case with accounts on the assets side of the balance sheet which are accumulated losses, deferred revenue expenses, losses not yet written off. All such assets are therefore assumed to financed by the owners equity, which bears all the losses ultimately. Thus it can be said that, accumulated losses are financed by owned capital. We can also say that owned Capital is wholly or partly supported by accumulated losses.

Shareholders Net Worth : Liabilities Side Approach

In the "Balance Sheet in a form suitable for Financial Analysis" , we start with the assets side (with current assets) and arrive at the figure of Share holders Net Worth as a residual figure. The same figure (Share holders Net Worth ) can obtained with a liabilities side approach. Particulars Amount Amount Equity Share Holders Net Worth represented by 1) Equity Share Capital 2) Reserves a) P/L Appropriation a/c (Retained Earnings) b) Share Premium c) Shares Forfeited d) Capital Redemption Reserve e) General Reserve 15,00,000 29,57,000 8,00,000 1,74,000 12,00,000 10,00,000 76,31,000 Less: ACCUMULATED LOSSES 1) Miscellaneous Expenses 2) Goodwill (self-generated) 3) Patents, Trademarks, Copyrights (unrealisable) 4) Discount on Issue of Shares/Debentures 2,40,000 2,00,000 2,00,000 1,10,000 6,00,000 Equity Share Holders Funds   70,31,000 The items that we deduct here are the same items that we consider as non-assets i.e. accumulated losses etc. These are the ones that are not considered as part of Fixed Assets while taking up the Assets Side Approach.

Information Derived

By arranging the balance sheet in a form suitable for financial analysis, we would be able to derive information relating to the various groupings that are made Liquid Assets Current Assets Current Liabilities/Provisions Fixed Assets Other Assets Long Term Liabilities. In addition the information that is extracted using these figures is also obtained from the same statement. Working Capital Net Assets Total Capital Employed Share Holders Net Worth Equity Share Holders Net Worth Non-Assets (Asset side items not to be considered as fixed assets)

Author Credit : The Edifier

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