Balance Sheet is a summary of what the firm owes and what the firm owns. It is divided into two parts i.e. Liabilities (owes) and Assets (owns). As per the present rule of representation Liabilities are called Sources of Funds and Assets are called Application of Funds. So, let us understand the meaning of these two titles carefully.
Sources of Funds: Liabilities
How can sources of funds become liabilities? When a firm (company) owes some funds to others it means that it has borrowed those funds from others. Since the company needs to repay these borrowings back, they become liabilities of the company. One needs to take a note of the fact that sources of funds of a company can be short-term or long-term in nature. Also, when the funds come from owners or promoters or shareholders of the company it becomes internal source of funds or Capital of the company. But when the funds come from external sources like banks or lending institutions they become external sources of funds. While the internal liabilities i.e. Capital does not bear any fixed rate of interest, the external liabilities are supposed to paid back at a certain predetermined rate of interest along with initial loan amount.
Application of Funds: Assets
How can application of funds become assets? When the company borrows money through Capital or Loan it deploys those funds in buying various short-term and long-term properties. Which means it applies the funds and converts them into assets. Since long-term assets like Land, Building or Machinery are intended to be used for a running the business they are treated as fixed assets of the business. On the other hand short-term assets like inventory of raw material and cash are supposed to be used for day to day business activities they are treated as current assets of the business. Fixed assets are belongings whose value depreciates over time. For example, machine purchased for Rs. 10 lakhs will not fetch the same amount after three years of use.
Tata Motors Ltd
Balance Sheet As on 31 March 2015 and 31 March 2014
| Particulars | Mar 2015 | Mar 2014 |
| SOURCES OF FUNDS : | ||
| Share Capital | 6,437 | 6,437 |
| Total Reserve | 142,188 | 185,328 |
| Secured Loans | 12,033 | 25,053 |
| Unsecured Loans | 135,065 | 92,117 |
| Total Liabilities | 295,723 | 308,935 |
| APPLICATION OF FUNDS : | ||
| Gross Block | 318,142 | 287,914 |
| Less: Accumulated Depreciation | 160,309 | 135,508 |
| Net Block | 157,833 | 152,406 |
| Capital Work in Progress | 60,407 | 63,550 |
| Investments | 195,664 | 215,005 |
| Current Assets, Loans & Advances | ||
| Inventories | 48,020 | 38,625 |
| Sundry Debtors | 11,144 | 12,167 |
| Cash and Bank | 9,447 | 2,261 |
| Other Current Assets | 10,723 | 9,965 |
| Loans and Advances | 6,191 | 3,362 |
| Total Current Assets | 85,525 | 66,380 |
| Less : Current Liabilities and Provisions | ||
| Current Liabilities | 197,575 | 169,046 |
| Provisions | 6,130 | 18,929 |
| Total Current Liabilities | 203,705 | 187,975 |
| Net Current Assets | (118,180) | (121,595) |
| Deferred Tax Assets / Liabilities | – | (431) |
| Total Assets | 295,724 | 308,935 |
Source: Tata Motors Annual Report 2014-15
A typical Balance Sheet looks like the one presented by Tata Motors (TML) for Financial 2014-15 and 2015-16 in its annual report to its shareholders. Many of us skip the pages of newspaper when we see a table like this because we feel it is too complicated to comprehend it. But let us make an attempt assuming that we have no formal accounting training. Observe the following 5 things in TML’s Balance Sheet:
- Total Liabilities (what TML owes) = Total Assets (what TML owns).
- Apart from Share Capital and accumulated profits i.e. Reserves, TML has borrowed money from other sources like Secured and Unsecured Loans.
- Gross Block minus Depreciation represents the value of fixed assets as on the date of Balance Sheet. It does not matter what was the buying price of these assets. What matters is its monetary worth in today’s terms.
- TML has made investments in other companies and it also has certain capital work in progress like projects which are under construction but not complete.
- TML has several short-term assets in the form of inventories, recoverable amounts from customers, cash and bank balance and loans given to others. So also TML has certain short-term dues called current liabilities towards other parties. The net of current assets minus current liabilities is called working capital of the company. In case of TML the working capital is negative.
This brief summary of TML’s Balance Sheet will help you assimilate the overall structure and scope of information presented by listed companies to its shareholders.
About the author: Prof. Anil Kshatriya works as Assistant Professor in the area of Finance at Institute of Management Technology, Nagpur. His teaching and research interests include Managerial Accounting, Management Control Systems and Strategic Management. Prof. Kshatriya is a professional accountant (CMA India) having associate memberships of Institute of Cost Accountant of India (ICAI) and Chartered Institute of Management Accountants (CIMA UK). His industry experience includes working as cost accountant with the Auto Sector at Mahindra Group. Prof. Kshatriya teaches courses in Accounting and Strategy at IMT.