The P&L statement provides insights into the profitability of a company for a given period. In contrast, the balance sheet is a picture of its assets, liabilities, and shareholders’ equity since it first began operating. The P&L statement assesses the performance for a single financial year, whereas the balance sheet demonstrates how the company has grown financially over time.
Examine the balance sheet of Amara Raja Batteries Limited (ARBL). Take a look at its various components, including cash and cash equivalents, fixed assets, non-current investments, current investments, current liabilities, loans and borrowings, and other long-term liabilities.
This balance sheet offers insight into a business’s assets, liabilities, and equity.
In the previous chapter, we discussed assets, which can consist of both tangible and intangible items that are owned by a company. A resource controlled by the organisation with economic value in the future is classified as an asset.
Examples of such elements include plants, machinery, money, brands, patents and so on. They are further divided into 2 parts- current and non-current. We will explore more about this further in the chapter.
Liability is the company’s responsibility, which it expects to be beneficial in the long run. Broadly speaking, this includes debts and payments due, both in the short and long terms. It’s important to note that liabilities come in two forms – current and non-current – which will be discussed further in the chapter.
In a standard balance sheet, the sum of all assets should amount to the total of liabilities. Thus,
Assets = Liabilities
The balance sheet equation shows that the balance sheet must always stay balanced. To clarify, this means that the Assets of the company need to be equal to Liabilities. This is because all of a company’s possessions (Assets) are bought either with the proprietor’s funds or via liabilities.
The difference between Assets and Liabilities is referred to as Owners’ Capital, Shareholders’ Equity or Net Worth. This can be demonstrated through the equation:
Shareholders equity = Assets – Liabilities
– A brief on shareholders’ funds
The balance sheet consists of two sections – assets and liabilities. The latter section consists of the company’s obligations, among which is the shareholders’ fund, depicted in the snapshot below. This may be difficult to comprehend for some people
We can consider the discussion of liabilities to be the company’s obligation and shareholders’ funds as representing the shareholders’ wealth. However, these 2 items can appear on the ‘Liabilities’ side of the balance sheet. After all, at its core, shareholders’ funds represent assets for the shareholders rather than a liability for the company.
This gives you an opportunity to look at a company’s financial statement in a different way. Consider the entire organisation as an individual in charge of running its core business and creating wealth for its stakeholders. Keeping the shareholders distinct from the company itself, you will come to realise that the financial statements are a communication from the business entity to give information about its financial status.
Remember that the shareholders’ funds are not owned by the company. It only belongs to the shareholder. As such, they are classified as liabilities on the company’s balance sheet, showing an obligation to be paid to shareholders.