 Namaste to all of you, welcome to the third session of financial accounting. In our first session, we had discussed the distinction between financial cost and management accounting and we had also seen the importance of accounting. In the second session, we started with our discussion on financial statements. If you remember, we have discussed the basic format of balance sheet and then we went on to understand what is annual report. If you remember, balance sheet is a statement which gives the financial position as on a particular date, it is a cumulative statement. Today, we are going to discuss further in detail about what is balance sheet and how it is prepared. We also discussed about annual report. Now, this is an authenticated document which is published by the company and it is a treasure of lot of data about companies. It is freely available, so I had told you to download annual report of one particular company and go through it in detail. It will give you financial statements, it will give you consolidated balance sheet, it will also give you various other statements which are very much relevant to understand the company, the nature of company and so on. I had told you that there will be a list of employees who are earning more than 60 lakhs per year. So, if you aspire to go there, first of all you should know the list. So, lot of information will be available. I hope by now you would have decided your company and also downloaded your annual report. We will be giving you some assignments at the end of the week which you have to do on your company. But right now, let us move to our session 3 which will discuss further about the balance sheet. So, introduction to the balance sheet and the elements of balance sheet. Now, you already know that financial statements, records or the provides information for about financial status. It can be for individual, it can be for organization, it can be for a particular business and so on. There are 3 important financial statements balance sheet, profit and loss and cash flow statement. So, in our course, we are going to discuss about how these are prepared and how they can be read and interpreted. Now, coming to specifically what the balance sheet is, it portrays the value of economic resources which are controlled by the enterprises. So, what they are known as economic resources controlled by enterprise, the accounting terminology for it is assets and also how they are financed. They are financed through variety of liabilities. So, either it is money put in by outsiders which is known as liability or it is money put in by the owners themselves which is known as owners fund or it is also called as equity. So, balance sheet is a statement which summarizes asset on one side and external and internal liabilities on the other side. Now just to get a feel of the balance sheet, this is the format in short. So, you can start from the asset side. In the last session, we have already discussed what are those items. So, the first one is fixed assets. This is various infrastructure of the company. The second one is non-current investments. These are long-term investments which are going to last for more than 1 year outside our business. The third one are current assets. These are assets which are intended to be held for less than 1 year. So, these 3 are the major assets or the resources of the undertaking. On the other side, we have got liabilities. These are the providers of funds. The first item there is owners fund. In our last session, we have discussed what does it consist of. Do you remember what is included in owner fund? There are 2 items. The first one is capital and the second one is reserves or accumulated profits. The second item is non-current liabilities. As the name suggests, non-current refers to one which is likely to last for more than 1 year. So, long-term liabilities. The third one is current liabilities or short-term liabilities or those liabilities which are likely to last for less than 1 year. So, just to have a glance, this one is not official format. We are going to it in the next slide, but just to understand in short what the balance sheet is. I think this format is very much useful. So, any balance sheet can be very much longer because of long large number of items. It can be summarized in this particular short form just to give at a first eye view of the balance sheet. Now, every balance sheet shall give a true and fair view of state of affairs. This is the terminology which accountants use. They do not show correct, they do not say correct view because there are lot of assumptions which go into valuation of certain items in the balance sheet, we will be discussing it later. But any balance sheet is supposed to give a true and fair view as at the end of financial year or it can also be prepared in between, it will be a balance sheet as at the end of that particular day. Now, let us go for a detailed balance sheet. Now, this is the official format as per the schedule 6 of companies act. This particular format was introduced in year 2011. That is why I have kept there 10 and 11 for a corporate balance sheet 2 year data is to be given. So, you can see 2 columns there, one for 2010, the other one is for 2011. Now, the first item there, it is going to start with the equity and liabilities that is I in that one is shareholders funds. If you remember in our earlier balance sheet, I will just go back. See here I have shown the first item as owners fund. Now, in this format it uses the term shareholders fund. Now, why is this difference? Why there it was owners fund and why here it is shareholders fund? Can you think of what is the difference? There is no difference as such, shareholders are nothing but the owners of the company. But since this is the format meant for the company, they have specifically used the term shareholders, while for using the short form, I had used the term owners fund because every balance sheet is not a balance sheet of a company. It can be a company, if it is a partnership firm, what, whose capital it will be? It will be called as a partners capital. If it is a proprietary concern with a single owner, it will be called as a proprietors capital. In case of a NGO or a non-profit organization, what it will be called? It is called as a capital fund. Okay, so overall whoever are the owners, it is their capital. Now let us go back to company balance sheet. In company balance sheet it is called as shareholders funds. Inside the shareholders fund, item A is share capital. Now how do you define share capital? What is a share capital? Yesterday, we had discussed in the last session, we had discussed about capital. Do you remember what is a capital? Capital refers to the money which is put in by the owners. In case of company, the shareholders are the owners, so money which is put in by the shareholders is known as share capital. There are 3-4 specific items under share capital, but we will not go right now into it, but whatever the money which they have paid, it is known as paid up capital. That will come here in the balance sheet. So item A is share capital. Second item is reserves and surplus. Now what do you understand by reserve and surplus? Reserves I think in the last session we had discussed, if you remember from the profit and loss account, the profit is generated by the entity or by the company. There are 2 choices with the company, either it can distribute profit to the owners, then it will not come in the balance sheet. But most of the good companies do not distribute whole of the profit, they may give part of the profit to the owner and remaining profit is plowed back into the balance sheet. Plowed back means instead of distributing, it is kept with the company and in the balance sheet it appears as a reserve. But the full name for it is reserves and surplus. Now in the last session we had seen that this profit which is plowed back is a reserve. Actually for a company there are some other types of reserves also. There can be statutory reserve, there can be capital reserve, there can be dividend equalization reserve. These are a few examples of reserve. The total of reserves and surplus is given as item B in the balance sheet. Now take a look at item C. The item C is money received against share warrants. Now the question which will arise in your mind is what is a share warrant? I think everybody knows the share. What is a share? So in the partnership firm, let us say there are 3 partners. Instead of writing total capital, we will say A is capital, B is capital, C is capital. But in company what happens? There are 1000, 1001 lakh, 10 lakh, there are large number of owners. So we do not write everybody's name in the balance sheet, we write the amount which is contributed by that persons, together it forms share capital. So share refers to the share in the ownership of a particular company. So for so many shareholders, suppose there are 10,000 shareholders in the company, everybody would have put in some capital. That total is the item number A, share capital. In item number C it talks about share warrant. So you will be wondering what is a warrant? Does anybody know what is a share warrant? Now sometimes what happens is a few people are entitled to receive share in future. So as of today they have not yet received shares, so we cannot show it in the share capital. Whoever has received share from a company and has paid the money will be share capital item A. But if that person has paid the money, but still has not been received, has not been issued a share, but has been issued a right to receive share in future. It is called as share warrant. That means suppose I am a company, there are 100 people who have paid me some money and I have issued them a warrant which gives them a right to get share in future. The money which is received by me, I am a company, so Rani which is received by me against those share warrants is that item number C, the money received against share warrant. Now you may be wondering why should company go into this business of issuing warrants? There are variety of reasons. As I told you one simple way is take money give them share, then it will go in item A that is known as share capital. But in certain instances as a company I do not want to give them share now, but I want to receive money and give them share in future. Then in such scenario I issue them share warrant. Can you think of any such scenario where a share warrant is received? I think some of you have guessed it correct. In many cases there are some shares known as ESOP that is Employee Stock Option Plan. Sometimes it is also known as sweat equity. So there are managers or executives who are working for the company, we want to incentivize them, because they are working very well. But we also want them to stay in the company, we do not want them to go out. So what we do is we will issue them warrant and attach a condition that if they continue in the company for next 3 years then that warrant can be converted into share. So this is one example of when the share warrant is received. Can you think of any other example? Sometimes what happens is company wants to raise loan. Let us say I go to bank and request the bank to give me loan. But what bank says is that bank wants the share in our profit. Now we cannot directly give them share. So what we do is when we take loan we give them some share warrants and these share warrants can later on be converted into shares by the bank. They pay some token money to receive the share warrant and that money is shown in item number C. Now you may be wondering that the share warrants is a small amount. Why so much discussion on it? Why so much discussion because later on it is going to be added to A and keep in mind that A that is share capital is a very important item. These are the owners of the company. So today's investors should know that there are some owners which are in future going to be included in the list of shares. Now they can be employees, they can be bankers, in some cases company gets some technology from some technical experts or some professionals. Maybe to compensate them we give them warrants. So all these are shown under item number C that is money received against share warrant. Obviously this item C is not there for a proprietary concern or for a partnership concern. So in that earlier short balance sheet it was not there but in a company balance sheet in a detailed format this item is bound to be disclosed. I hope you are getting what is item number C. Now we will go to the next slide. Now item number 2, this is share application money pending allotment. Now what is meant by application money? Many of you would be aware that whenever the shares are issued first of all the shareholder or a prospective shareholder has to pay to the company. So suppose I am a company I want to issue shares. Of course my Foucault may shares neither out they are going to pay me. So I declare that I am willing to issue shares. Jobe prospective investors say people who want the shares in my company they would come forward and pay me some money. Now I receive money and if I give them shares then no problem it will go in 1A that is share capital. However what happens is if a company wants to issue shares, it declares that it is willing to issue shares, they would pay money and they want to issue share receive shares. Now if they are issued shares then it will go in 1A no problem but in some cases what happens is the allotment of shares is delayed means I receive the money now but till the end of the year the shares are not allotted that is and then where will you keep that money that particular amount is kept under this item number 2. So I hope you have got it now. So share application money pending allotment that means suppose I have received 10 lakhs from the shareholders I have still not given them shares. So it is an application money but the allotment of share has not happened allotment means giving process of giving the shares that has not yet happened that is why it is shown as share application money pending allotment it is shown as a separate item because later on it is going to be added to 1A that is share capital or the other possibility is I can reject their applications and I will refund the money. So whether it is a share holders funds or whether it is a liability if I give them shares it becomes shareholder fund if I give them back to the prospective investors it becomes a external liability that is why there is a second item is a specific item known as share application money pending allotment. Now the third item, the third item is non-current liabilities now we have discussed it earlier in the last session also and also in the beginning of the session. So what do you understand by non-current I think by now everybody knows that whatever is intended to be settled within 1 year is we call current if it is likely to last for more than 1 year we call it non-current. So yes are items long term liabilities examples they are going to be for more than 1 year. So they come under item number 3 non-current liabilities. In that if you see A it is long term borrowings now as the name suggests it is for a long term more than 1 year a borrowing what do you mean by borrowing? Borrowing refers to the loans which are taken by the company. So company most probably will take loans from banks it can also take loans from financial institutions it can take loans from non-banking financial companies or NBFCs are as they are known as from anybody if they have taken loan then it will be shown under the head 3A as long term borrowings. Now 3B deferred tax liability now what do you mean by deferred? That means instead of paying now I am going to pay it in future after 1 year and tax liability see normally the tax liabilities are to be paid in the same year then it is known as current tax liability but a part of the tax liability instead of paying now is paid after 2 years, 3 years, 4 years then it is called as a deferred tax liability. Government decides as to what tax liability you have to pay now and a part of the tax liability as an incentive they say okay you do not pay it now you pay after 2, 3 years we will discuss it later on as to which items are deferred but in general whichever items which are not to be paid in next year but can be paid beyond that then it is called as a deferred tax liability then the item C 3C is other non-current other long term liabilities non-current and long term is almost same. So we have already seen that A refers to long term loans B refers to deferred tax liability. Iske alawa agar koi long term liability hai then it is shown under C as other non-current liability. Now the question in your mind will be which are such items can you think of any such item I will just give you an example. Suppose we have received deposit from somebody it is not the loan but the deposit is likely to be paid after 2 years, 3 years, 4 years etc. Then it will fall in 3C because it is neither borrowing nor it is a tax liability but it is a long term in nature it is not a short term deposit it is to be paid after 2, 3 years then it will be shown as a other non-current liability. Then the fourth item 3D that is long term provisions, long term means more than 1 year that you are aware but what do you understand by provision? Is anybody aware what is a provision? See this is a amount which is payable but how much is payable is not known to me to the full accuracy with the exact details a few of the details are not yet known information is not available. So what I do is I make the best estimate of a particular liability and show it as a provision. So such long term items are shown as long term provisions. Can you think of any example of any provision which is long term in nature? Suppose a customer has filed a complaint against me and wants to take some compensation because of deficiency in service. We are having argument with the customer some case is on or some discussion is on we are not going to pay it immediately. After some court decision or after some authority's decisions we will pay it. It will take 2, 3, 4 years. In such case whatever is likely to be payable as a compensation will be shown as a long term provision or another example I give we have got lot of employees working in our company. When they retire they have to be paid with gratuity. Because it depends on the salary of that person at the time of retirement. Retirement age we do not know or in case of unfortunate death of the person we have to pay it at the time of death. So nobody knows the date of death. So naturally we do not know the exact amount of gratuity but we make our best estimate and that estimated liability of gratuity will be shown as a long term provision. Later on we are going to discuss a bit more on provision but right now I think you would have generally understood that this is a one of the long term liabilities that is why it is shown under item 3 that is non-current liabilities. Now the next one is current liabilities. Now in the last session we have already discussed what is a current liability it is less than one year period and it comes from the business cycle. So mostly it relates to day to day transactions of the business. So 3A refers to short term borrowings. Now we already know long term borrowings means more than one year the short term borrowings are loans which are taken for less than one year. So for example we have approached bank for a bridge loan. Bridge loan is typically sanctioned for just 2 months, 3 months, 4 months period. That means we are going to start a new project but it will start after 3 months. So for that 3 months we have obtained some loan. That bridge loan which is 3 month loan so it is shown as a short term provision. For that matter any loan which is less than one year accepted from banks or NBFCs will be a short term borrowing. Next one is trade payables. I think most of you are aware about it that whenever we buy any item in a B2B transaction it is not across the counter. Here in business transaction what happens company places a order, the goods are delivered and payment is done after 15 days, 1 month, 2 month etc. So from the date of purchase till the date of payment the amount is a payable. It is related to our regular trading activity that is why it is shown as a trade payable. Only trade payables will be for 15 days, 1 month, 2 months and so on. So that is why they are clubbed under current liabilities. The third one are other current liabilities. So as you know what is not covered in borrowing or trade payables there can be any other items. Can you think of any examples? Most of you would have got this in your mind that suppose salaries are there. So we are supposed to pay salary on 31st of the month or 30th of the month. But if you do not pay then till the time you pay it becomes an outstanding salary. So it is an example of other current liabilities. Same way electricity bill or rent or any other office expense which is not paid but is payable in the short term that will be other current liability. And the last item in this head that is 4D is short term provision. We have already discussed the provision. So a particular liability where amount is not known with substantial accuracy is a provision. But it is payable in the short term period then it is called as a short term provision. So with this that is right now we have gone through 1, 2, 3 and 4. So we have finished the asset side of a detailed format. In the next session we will discuss about we have completed the liability side of the format. Now we will next session we will discuss about the asset side. Namaste. Thank you very much for watching this video and I will see you in the next session.