Understanding the Balance Sheet

SOURCES OF FUNDS

The sources of funds is divided and disclosed under the heads:

• Shareholder's Funds.

• Loan Funds. 

Shareholder's Funds

They represent the ownership interest in the company. It is the residual interest in assets that remains after meeting all liabilities. The owners bear the greater risk because their claims are subordinate to creditors in the event of liquidation, but owners also benefit from the rewards of a successful enterprise. The ownership interest may be further sub-divided into:

• Share Capital.

• Reserves and Surplus.

Share Capital: The capital raised by the company through the issuance of shares is known as Share Capital. The Companies Act basically provides for two classes of shares - Equity shares and Preference shares. Preference shares enjoy preferential treatment with regard to the payment of dividend and repayment of capital. Equity shareholders enjoy voting rights. But there is no obligation to the company to pay dividends at a fixed rate every year. Even at the time of winding up of the company, they receive their capital only after payment to preference shareholders.

Further details of Share Capital are as below:

1. Authorized capital - It must mention the total number of shares and the face value of each share.

2. Issued capital - It must distinguish between the various classes of shares issued to the public and in respect of each class of shares, the number issued and the face value specified.

3. Subscribed capital - It must distinguish between the various classes of shares actually taken up by the public and in respect of each class, the number of shares actually taken up and the face value should be disclosed. If shares have been allotted as fully paid-up for consideration other than cash (say, shares issued in the takeover of a business), then the number of such shares so allotted must be disclosed. Also, the number of shares which have been allotted as fully paid-up by way of bonus shares should also be disclosed.

4. The called-up capital and any calls unpaid or in arrears should be shown as a deduction from the called-up capital to arrive at the paid-up capital.

5. In respect of calls-in-arrears, the calls unpaid by directors and by others must be shown distinctly.

6. Any forfeited shares to the extent they have not been reissued and to the extent of the value originally paid-up must be shown as an addition to the capital.

The particulars of different classes of preference shares should be provided. These include -

1. Terms of redemption or conversion (if any), of any redeemable preference share capital should be stated together with earliest date of redemption or conversion.

2. The source from which the bonus shares have been issued, for example, capitalization of profits or reserves or from share premium account, should also be specified.

Reserves and Surplus: Reserves and surplus are profits the firm retains. Revenue reserves represent accumulated retained earnings from profits from normal business operations. These take several forms such as General Reserve, Investment allowance reserve, capital redemption reserve, dividend equalization reserve, etc. Capital reserves arise out of gains which are not related to the normal business operations. Examples of such gains are the premium on issue of shares or gains on revaluation of assets.

Surplus is the balance in the profit and loss account which has not been appropriated to any particular reserve account. It may be noted that reserves and surplus along with equity capital represents an owner's equity.

The following items appear under 'Reserves and Surplus':

1. Capital Reserves.

2. Capital Redemption Reserve.

3. Share Premium Account.

4. Other Reserves specifying the nature of each reserve and the amount, less any debit balance in the Profit and Loss Account (if any).

5. Surplus, that is, balance in Profit and Loss Account after providing for dividend, bonus or reserves.

6. Proposed additions to reserves.

7. Sinking Funds.

In respect of each of the item listed under 'Reserves and Surplus', the additions and deductions since the last balance sheet would be shown.

The word 'fund' in relation to any 'Reserve' should be used only where such reserve is specifically represented by earmarked investments.

The share premium account should include details of its utilization in the manner specified under the Companies Act.

Loan Funds

These represent the creditorship interest in the concern. Loan Funds are further divided and disclosed under the heads:

• Secured Loans.

• Unsecured Loans.

Secured Loans: Secured loans refer to loans wholly or partly secured against an asset. This head includes loans secured by hypothecation of fixed assets or current assets of the company. The nature of security is to be disclosed along with getting the hypothecation registered with the Registrar of Companies under the provisions of Section 125 of the Companies Act. The following are the items to be included under the category of secured loans:

1. Debentures (Companies sometimes disclose Debentures separately in the body of the Balance sheet itself under the head of Loan Funds after Secured Loans).

2. Loans and Advances from Banks.

3. Loans and Advances from Subsidiaries.

4. Other Loans and Advances.

Unsecured Loans: Loans taken by the company for which no security is furnished are classified as "Unsecured loans".  Under the Schedule to 'Unsecured Loans', the following items should be shown:

1. Fixed Deposits.

2. Loans and Advances from Subsidiaries.

3. Short-term Loans and Advances:

1. From Banks.

2. From Others.

1. Other Loans and Advances:

1. From Banks.

2. From Others.

The similar details required to be disclosed in respect of Secured Loans should be disclosed in respect of Unsecured Loans also. The short-term loans will include those which are due for not more than one year as at the date of the balance sheet.

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