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How to Read the Balance Sheet of a Company

To read balance sheet is the important part of financial analysis. If you do not learn and understand the the financial statement analysis, you can not select better stock. 

Every company issues its balance sheet every quarter. Means, after every 3 months, you will see new balance sheet of a company. It means, you will get 4 balance sheet in a year after every 3 months.

In India, financial year will start   on 1st April and end on 31st march. 

So, you will get following balance sheet

Q 1 Balance sheet

Balance sheet shows the financial position from 

1st April to 30th June

Q 2 Balance sheet

Balance sheet shows the financial position from 

1st july to 30th sept

Q3 Balance sheet

Balance sheet shows the financial position from 

1st oct to 31th dec. 

Q 4 Balance sheet

Balance sheet shows the financial position from 

1st jan  to 31st march

Annual Balance Sheet 

Balance sheet shows the financial position from 

1st april to 31th march

On the end of year, company makes annual balance sheet.

First of all you should know what is the balance sheet

Balance sheet is the list of balance of assets and liabilities. It also balance both assets and liabilities and its total always equal if there is no mistake in liabilities and assets account or amount. 

Read to Company's Asset

What company has, it is its assets like building, cash, vehicles, investment etc.

If company has its own building, it is its asset. 

If company has own car, own truck or other vehicles, it is its assts. 

If company has the money in its bank account, it is its asset. 

Read Company's Liability

What company has to pay, is its liability. 

If company has taken the loan for making building or buying car or vehicle, it is its liability.

If company is paying EMI for buying car, vehicle, it will also its liability

If company has taken loan for operating its business or day to day expenses, it will also its liability. 

In simple words, liability of company means source of company's fund and asset of company is use of same fund. 

Because company has to make its machine for production and company has taken loan from sbi bank. So, loan from sbi is its source of fund. So, it is its liability. 

For Example

We start to read NIIT Company's Balance Sheet 

Following is the liability side of NIIT Company

In this balance sheet, we are seeing 31st march, company has 28 crore as share capital 28 crores of rupees. It means, it has sold it shares and collected fund from shareholders. It is its long term liability. 

In the balance sheet, we are seeing reserve and surplus Rs. 1596 crore, it means, company has saved profit after deducting dividend for growth of business. Because it is also payable to shareholder if company liquidate today, so it is liability of company. Reserve and surplus also shows the fund if company sells its share more than its face price value. That is called primum. 

Now, we understand, how is equity share capital and its reserve and surplus is liability of company. 

Company has two ways to collect its fund for operating its business. One is equity financing and other is debt financing. In debt financing, company use creditor's money and return principal and its interest at the maturity. But if company collects the money by selling its shares to shareholder, it is called equity financing and shareholder becomes the owner of same company, company need to return their money. Company manages the business and responsible to share its profit to shareholder as dividend. So, company's all equity share capital and reserve is payable to equity shareholder only in case if company is bankrupt. 

For operating its business, company has taken short term loan and it will repay with interest or not interest like creditors. so, it is current liability of Rs. 479 crore. Other are small liability of Rs. 47 crore. In this, there may be Security deposit, rent advance deposit from students, deferred credit.
Remember liabilities are of two types. One is current liability and second is non current liability. Current liability is the liability for one year and non current liability is more than one year. Long term borrowing which is not shown because NIIT  did not get, is the example of non current liability. 

In above figure, we are seeing fixed assets 279 crore rupees. It means, company has used shareholder funds 28 crore and reserved fund ( Reserve profit of shareholders) for buying fixed assets like building, machine and vehicles. So, it is fixed assets of company. We are seeing current asset of 1772 crore, it means this fund either in bank account or in current asset buying means fees receivable from its customers. For current asset, it either used its equity capital or current liability. For example, we are seeing its current liability Rs. 479 crore, it may be used for buying current assets, so, current asset is the asset of company. Other assets of Rs. 100 crore. 

Both assets and liability total is equal = 2152 crore

Both side always equal and balanced. 

We know, more debt is dangerous for company, but how we calculate that company has taken more debt. For this, we have taken the help of debt to equity ration and debt burden ratio 

Company also tells notes and details in the footnote outside the balance sheet. For example any other any other company has long term borrowing. then footnote will tell from which person we took loan and at what rate of interest and how long, we have to pay. 

Start your balance sheet learning journey with our ebook!   https://www.krantikari.org/2017/05/balance-sheet-made-easy.html 

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Accounting Education: How to Read the Balance Sheet of a Company
How to Read the Balance Sheet of a Company
Accounting Education
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