Key Pointers to Balance Sheet and Profit and Loss Statements

Topics: Generally Accepted Accounting Principles, Balance sheet, Inventory Pages: 24 (7303 words) Published: September 3, 2011
Key pointers to balance sheet and profit and loss statements:

A balance sheet represents the financial affairs of the company and is also referred to as “Assets and Liabilities” statement and is always as on a particular date and not for a period.

A profit and loss account represents the summary of financial transactions during a particular period and depicts the profit or loss for the period along with income tax paid on the profit and how the profit has been allocated (appropriated).

Net worth means total of share capital and reserves and surplus. This includes preference share capital unlike in Accounts preference share capital is treated as a debt. For the purpose of debt to equity ratio, the necessary adjustment has to be done by reducing preference share capital from net worth and adding it to the debt in the numerator.

Reserves and surplus represent the profit retained in business since inception of business. “Surplus” indicates the figure carried forward from the profit and loss appropriation account to the balance sheet, without allocating the same to any specific reserve. Hence, it is mostly called “unallocated surplus”. The company wants to keep a portion of profit in the free form so that it is available during the next year for appropriation without any problem. In the absence of this arrangement during the year of inadequate profits, the company may have to write back a part of the general reserves for which approval from the board and the general members would be required.

Secured loans represent loans taken from banks, financial institutions, debentures (either from public or through private placement), bonds etc. for which the company has mortgaged immovable fixed assets (land and building) and/or hypothecated movable fixed assets (at times even working capital assets with the explicit permission of the working capital banks)

Usually, debentures, bonds and loans for fixed assets are secured by fixed assets, while loans from banks for working capital, i.e., current assets are secured by current assets. These loans enjoy priority over unsecured loans for settlement of claims against the company.

Unsecured loans represent fixed deposits taken from public (if any) as per the provisions of Section 58 (A) of The Companies Act, 1956 and in accordance with the provisions of Acceptance of Deposit Rules, 1975 and loans, if any, from promoters, friends, relatives etc. for which no security has been offered.

Such unsecured loans rank second and subsequent to secured loans for settlement of claims against the company. There are other unsecured creditors also, forming part of current liabilities, like, creditors for purchase of materials, provisions etc.

Gross block = gross fixed assets mean the cost price of the fixed assets. Cumulative depreciation in the books is as per the provisions of The Companies Act, 1956, Schedule XIV. It is last cumulative depreciation till last year + depreciation claimed during the current year. Net block = net fixed assets mean the depreciated value of fixed assets.

Capital work-in-progress – This represents advances, if any, given to building contractors, value of building yet to be completed, advances, if any, given to equipment suppliers etc. Once the equipment is received and the building is complete, the fixed assets are capitalised in the books, for claiming depreciation from that year onwards. Till then, it is reflected in the form of capital work in progress.

Investments – Investment made in shares/bonds/units of Unit Trust of India etc. This type of investment should be ideally from the profits of the organisation and not from any other funds, which are required either for working capital or capital expenditure. They are bifurcated in the schedule, into “quoted and traded” and “unquoted and not traded” depending upon the nature of the investment, as to whether they can be liquidiated in the secondary market or not....
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