Definition: A balance sheet is a document which summarizes a company’s assets, liabilities and
stockholders equity at a point of time. To put it in simple terms, a balance sheet is like a snap shot of
a horse race, shows the financial position of a company at a particular point of time.
Components of a balance sheet:
Assets
Liabilities
Ratios used
Assets:
1. Current Assets: These are assets that may be converted into cash, sold or consumed within a
year or less. Current Assets include cash, marketable securities, Account and notes
receivables, inventories etc.
2. Fixed Assets: Fixed assets are those tangible physical facilities owned by an enterprise, which
are permanent/durable in nature. Fixed assets are not turned over, meaning they are not
converted into cash. For example: Land and building, machinery, tools, equipments etc.
3. Intangible Assets: These assets do not exist in physical form but are notional possessions
owned by an enterprise. These assets generally don’t have real money value but are
important for a company. For example: patents, goodwill, trade-mark etc.
Liabilities:
1.Current liabilities : Those obligations of a company which are payable on demand or within a
period of less than 1 year from the date of the balance sheet.
2.Term Liabilities: A term liability is a debt which matures after a period of 12 months from the
date of the balance sheet
3.Net Worth: The net worth of a company is the owner’s stake in the business. It is a liability of
a company towards its promoters. It is therefore an important item on the balance sheet on
which a lending banker can rely.
4.Specific Reserves and Provisions: Specific Reserves and Provisions are created for the
payment of taxes, dividends and other contingencies.
Ratios:
Ratios Showing Liquidity:
Current Ratio - Ratio of current assets to current liabilities.
Quick Ratio - It is an index of the solvency of an enterprise. Basically quick ratio is the ratio of (Current assets-inventories) and current liabilities.
Ratio showing Financial Stability:
Debt-Equity Ratio - This ratio indicates the relative proportion of shareholders' equity and debt used
to finance a company's assets.
Ratios Showing Profitability:
a.Return on investment ratio- This ratio measures the operating efficiency of a company
without regards to financial structure.
b.Return on Equity Ratio- It is the ratio of net income of a business during a period to its
stockholders' equity during that period.
Thanks Madhu!!