A company’s balance sheet is one of its most important financial statements. It is used basically to show the exact financial position of companies. One can learn about a company’s assets and liabilities using a horizontal balance sheet.
A balance sheet is one of the three most important financial statements of companies. It is based on the simple accounting equation of Assets = Capital + Liabilities. It shows the financial position of companies.
Every company is required to make a balance sheet at the end of each financial year. From shareholders to company managers, government agencies and investors, many stakeholders use balance sheets. They use the information contained in it to assess a company’s state of affairs.
Balance Sheet format
Balance sheets are based on the equation of Assets = Capital + Liabilities. Hence, it is divided into two parts representing the two sides of this equation.
One side of a balance sheet shows all kinds of assets that a company possesses. This includes current as well as non-current (i.e. capital or long-term) assets.
The other side of a balance sheet contains details of the company’s debts and liabilities. Users can access both current and non-current liabilities. It even shows the capital structure of the company.
Horizontal Balance Sheet
As the name suggests, a horizontal balance sheet is horizontal in format. This is the most common form of balance sheets. While drafting it, accountants first have to divide the page horizontally into two halves.
The first half of a horizontal balance sheet on the left-hand side shows capital and liabilities, while the other half shows all assets.
Learn about the Types of Companies here.
Accountants have recently started adopting vertical balance sheets. In this format, the top half shows capital and liabilities, while the bottom half shows assets.
Schedule III of the Companies Act, 2013 shows how a balance sheet must look. Even Accounting and Auditing Standards of ICAI describe elements of a typical balance sheet. Chartered Accountants must follow all these rules and formats.
Contents of a Horizontal Balance Sheet
A typical balance sheet contains the following sub-headings and elements:
1. Share Capital
This part of the balance sheet generally shows all relevant information relating to a company’s shares. It shows how many shares have been authorized, issued, subscribed, paid-up and forfeited. Furthermore, it even shows the par value of shares and the number of shares outstanding.
2. Reserves and Surplus
This column explains how a company has distributed its capital reserve amounts along with any surplus from Profit & Loss Account. Consequently, reserves can include capital reserve, debenture redemption reserve, securities premium reserve or any other reserve.
A company’s borrowings may be either long-term or short-term. Long-term debts are those whose maturity periods extend beyond 12 months and short-term ones mature before a year.
Hence, long-term borrowings include bonds, debentures, bank loans, advances from related parties, lease obligations, deposits, etc. On the contrary, short-term borrowings are short-term loans, loans repayable on demand, trade payables, etc.
4. Current liabilities
Apart from borrowings, a company may also have some other current liabilities to its name. For example, income received in advance, excess application money due for refund and unpaid dividends.
5. Tangible & Intangible assets
A horizontal balance sheet shows assets on the right-hand side, while a vertical one shows it below liabilities. The assets of a company may be either tangible or intangible.
Tangible assets are basically those which can be seen physically. Thus, these include land, buildings, fixtures, machinery, vehicles, etc.
On the other hand, intangible assets are those which we cannot see and touch but which have some monetary value. These include goodwill, intellectual property rights, licenses, rights, etc.
Investments are basically expenses that yield some income in the future. Hence, they may be either long-term (generating income after 12 months) or short-term (generating income within 12 months). A company may make investments in real estate, government securities, equities, mutual funds, etc.
A balance sheet treats inventories as current assets. These generally include raw materials, finished goods, loose tools, stock in trade, goods in transit and spare goods.
8. Cash and cash equivalents
A company always has to show its cash, bank balances, cheques, and other similar liquid cash equivalents as assets.
Solved Examples on Horizontal Balance Sheet
Name the relevant heads of a balance sheet under which the following items will be shown.
1. Investment in mutual funds
2. Excess application money repayable
3. Loose tools
4. Outstanding share capital amounts
5. Deposit amount payable
Answers: 1. Investments 2. Current liabilities 3. Inventories 4. Share capital 5. Borrowings