Reading a balance sheet

The balance sheet is a photograph taken at a single point in time, the last day of a quarter or financial year. It answers: what does the company own, what does it owe, and what is left for shareholders?

The fundamental equation is Assets = Liabilities + Equity. Every rupee that flows into a business comes from either lenders (liabilities) or owners (equity). Those funds are then deployed into assets, factories, inventory, cash, receivables. This equation must always balance.

Unlike the P&L which shows flows over time, the balance sheet reflects accumulated history. Retained profits from previous years build up shareholders' equity. Old debt gradually gets repaid. Capital expenditure shows up as fixed assets that then depreciate over time.

Structure under Ind AS:

Sources of Funds (Equity & Liabilities)

• Shareholders' Equity: Share capital + Other equity (retained earnings, securities premium, reserves)
• Non-Current Liabilities: Long-term borrowings, deferred tax liability, lease liabilities (Ind AS 116)
• Current Liabilities: Short-term borrowings, trade payables, other current liabilities, provisions

Application of Funds (Assets)

• Non-Current Assets: Property, plant & equipment (PP&E), intangibles (goodwill, patents), investments, deferred tax asset
• Current Assets: Inventories, trade receivables, cash & equivalents, other current assets

Key metrics derived:

• Book Value per Share = Total Equity ÷ Shares Outstanding
• Net Debt = Total Borrowings − Cash & Liquid Investments
• Net Worth = Share Capital + Reserves & Surplus
• Working Capital = Current Assets − Current Liabilities