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Lesson 1 of 4Financial Statements

Balance Sheet Guide

The balance sheet is one of the three core financial statements. It provides a snapshot of what a company owns (assets), what it owes (liabilities), and the residual interest of owners (equity) at a specific moment in time — like a financial photograph of the business.

The Balance Sheet Equation

Assets = Liabilities + Equity

This equation must ALWAYS balance. If it doesn't, there's an error in the books.

Think of it this way: everything a business owns (assets) was paid for either by borrowing money (liabilities) or by the owners putting money in (equity). The two sides must always equal.

Three Components Explained

1. Assets — What the Business Owns

Current Assets (within 12 months)

  • • Cash & Bank — Money in hand and bank accounts
  • • Accounts Receivable — Money owed by customers
  • • Inventory — Goods held for sale
  • • Prepaid Expenses — Rent, insurance paid in advance
  • • Short-term Investments — FDs, money market funds

Non-Current Assets (beyond 12 months)

  • • Property, Plant & Equipment — Land, buildings, machinery
  • • Intangible Assets — Patents, trademarks, goodwill
  • • Long-term Investments — Equity in other companies
  • • Deferred Tax Assets — Future tax benefits
  • • Right-of-Use Assets — Leased assets (IFRS 16)

2. Liabilities — What the Business Owes

Current Liabilities (due within 12 months)

  • • Accounts Payable — Money owed to suppliers
  • • Short-term Loans — Overdrafts, working capital loans
  • • Accrued Expenses — Salaries, rent, utilities due
  • • Tax Payable — GST/VAT, income tax due
  • • Unearned Revenue — Advance payments from customers

Non-Current Liabilities (beyond 12 months)

  • • Long-term Loans — Term loans, mortgages
  • • Bonds Payable — Debentures issued
  • • Lease Obligations — Long-term lease payments
  • • Deferred Tax Liabilities — Future tax obligations
  • • Employee Benefits — Gratuity, pension obligations

3. Equity — Owner's Residual Interest

  • • Share Capital / Owner's Capital — Money invested by owners or shareholders
  • • Retained Earnings — Accumulated profits not distributed as dividends
  • • Reserves — General reserve, capital reserve, revaluation reserve
  • • Other Comprehensive Income (OCI) — Unrealized gains/losses on investments, foreign currency translation
Formula: Equity = Assets − Liabilities. If assets are ₹50L and liabilities are ₹30L, equity is ₹20L.

Sample Balance Sheet

Here's a simplified balance sheet for "ABC Trading Co." as at March 31, 2026:

ParticularsAmount (₹)
ASSETS
Cash & Bank5,00,000
Accounts Receivable3,50,000
Inventory4,00,000
Property & Equipment7,50,000
Total Assets20,00,000
LIABILITIES
Accounts Payable2,50,000
Bank Loan5,00,000
Tax Payable50,000
Total Liabilities8,00,000
EQUITY
Owner's Capital8,00,000
Retained Earnings4,00,000
Total Equity12,00,000
Total Liabilities + Equity20,00,000 ✓

Key Balance Sheet Ratios

Current Ratio

Current Assets ÷ Current Liabilities

Example: ₹12.5L ÷ ₹3L = 4.17

Above 1.5 is healthy. Measures ability to pay short-term debts.

Debt-to-Equity

Total Liabilities ÷ Total Equity

Example: ₹8L ÷ ₹12L = 0.67

Below 1.0 means the business is more equity-funded than debt-funded.

Quick Ratio

(Current Assets − Inventory) ÷ Current Liabilities

Example: (₹12.5L − ₹4L) ÷ ₹3L = 2.83

Above 1.0 means can pay debts without selling inventory.

Key Takeaways

A balance sheet shows assets, liabilities, and equity at a specific date — it's a snapshot, not a period report

Assets = Liabilities + Equity must always balance (that's why it's called a balance sheet)

Current vs non-current classification helps assess liquidity — can the business pay its near-term obligations?

Key ratios (Current Ratio, Debt-to-Equity, Quick Ratio) reveal financial health at a glance

Compare balance sheets across periods to spot trends — growing receivables may signal collection problems

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