 Namaste, I hope you have enjoyed the last week sessions and you are also able to comfortably complete the assignment. So, we were discussing financial statements, particularly we were discussing balance sheet, we have also seen the format of balance sheet and now we are discussing each element of balance sheet. So, already on the screen you are seeing three major elements, assets, liabilities and owners funds. Within that we have already discussed asset and almost completed the liability, today we will go into owners fund, then we will see the process how the balance sheet emerges and then we will go to discuss what is a profit and loss account. Right now let us briefly revise asset and liabilities, so these are assets, I think you all know this is something which is a property or a resource of a company which has a value and it is likely to give some probable future cash flow. There are variety of examples which are in front of you, so I am not repeating them, in two major types of assets, non-current current within non-current you have got fixed and fixed assets and investment. Now what do you mean by fixed assets, this is a infrastructure or a property which is going to last for more than one year it acts as a catalyst in our operations. There are two types, tangible fixed assets and tangible fixed assets. Example are land, building, plant, machinery, variety of things which we see in front of us which are going to have a longer life, these are all tangible. Intangible we cannot see or we cannot at such touch it but they have a value, they are very important to us, they can include software, they can include apps on your mobiles, they can include patents and so on. So these are the examples, then the next type is current assets. Current assets have a life of less than one year, there are two major types, monetary and non-monetary, so within monetary what are the examples, debtors and bank balances as we saw last time and in non-monetary category you have got variety of inventory or stock like raw material or like finished goods, there is also one more type known as work in progress stock that is also an example of non-monetary asset. Then we went to discuss the liabilities, these are the present obligations, these are the dues which company or an enterprise has to pay and you can reasonably estimate the amounts and they would result in outflow in future. Now what are the types and what are the examples of those liabilities? So again you have got long-term liabilities, short-term liabilities. So what are the examples of long-term mostly bank loans or loans from NBFCs or deferred tax obligations, these are all long-term liabilities. The other one is current or a short-term liability, what are the examples? They include bank overdraft, they include payables or creditors, they include variety of outstanding expenses. Can you give any example of outstanding expense? Last time we discussed about salary but do you think of any other expense which is not paid on time? Suppose we have purchased stationary but we do not pay the stationary bill immediately, we will pay it after some time, till the time it is paid it becomes outstanding expense. Any expense you can think of if not paid on the date you got the service or the product it becomes an outstanding expense. Now provisions, now this is a specific type of liability wherein the amount is not known with substantial accuracy. We know the existence of liability but not the amount. So example can you think of any example, the four examples are in front of you but apart from that is there any other example of a provision, just think over it. Suppose some repair work is done in our factory or in office, we do not know exactly what was done in the repairs, the particular party who has done repair has not yet sent the bill. So we do not know the charges but we know that repairs has been done and we are required to prepare a balance sheet on say 31st of March, then we will make a provision for repair. There is another possible case, we have sold products for which we have given a guarantee. Suppose of guarantee clause, now for one year we will have to provide a free service. Suppose there is any damage in the product we will have to repair it for free or we may even have to replace it. Then for one year there is an existence of an obligation but we do not know the amount. We may have to pay more or less but we will calculate some estimation, based on our past record or based on whatever is likelihood of the repair and replacement cost. Let us say 2 percent or 3 percent may be set aside for provision for repairs. Can you think of any other example? One more example is gratuity, I think most of you know that whenever an employee retires or in case of unfortunate death of employee we have to pay gratuity to the employee. The gratuity is calculated on the basis of number of years of service, that service can be 5 years, 6 years, 10 years, 40 years whatever according to the tenure of that employee and the retirement salary of that employee company has to pay gratuity. Now as on the day of balance sheet we are not sure about the gratuity amount payable but the liability exists. So in such case we will calculate provision for gratuity ok and plus 4 more examples given here I hope the concept of provision is clear to you. Now there is one more special type of liability where neither we know the amount nor we know the existence of asset. Now you question why it come in your mind, the amount be malum nahi hai, uska existence be certain nahi hai, whether the liability would be created or no is also not known. Is it necessary to show such a liability in the balance sheet? What do you think? The answer is yes, even if there is a very small likelihood of getting an obligation, fakka nahi hai nahi, certainty nahi hai ki obligation aega hi aega, but there is a very small chance that we may get an obligation in such scenario also we will have to show that liability, that liability is called as contingent liability. As the name suggests contingent liability is a possible obligation, this obligation may arise since it is not a present obligation. If you remember when we discussed or defined the liability we had said that it is a present obligation arising from the past event. Now contingent liability is a possible obligation, since it is just a possible obligation it is not actually shown as a part of balance sheet, but it is required to be shown as a foot note. So, below the balance sheet we have to give a note for all the contingent liabilities, are you getting me? Now can you think of any examples? I think you are seeing what is the meaning that it may or may not arise as per occurrence of some events, jis mein sab kuch uncertain hai, but liability or obligation aasakta hai and enterprise or a company has no control over that event. Can you think of any example? One of the best example are court cases, suppose one of our customer feels that whatever service we have given is not a satisfactory service, we have say given a wrong product or sold a wrong product to a customer which is of a poor quality, customer files a complaint against us to a consumer court or even files a case against us in the court saying that this product was faulty and we will have to give compensation to the customer. Now there are two possibilities, in possibility one we accept that there was a fault on our part and we agree to pay some compensation, but amount is not yet known, kuch to discussion chal raya customer, customer bhol raya am kuch das lak compensation though, we say no 10 lakh is too much, we will pay you 1 lakh, then dono ke bhijh mein negotiation hoga and then the amount will be decided, in such case it will be called as a provision, because we have accepted our obligation, now the liability is there is certain, but the amount is still being decided, but in a case where we refuse our obligation, that means we say that nothing is payable as a damages or as a compensation, our product is of good quality, but still customer says no product is of bad quality, claims a compensation of 10 lakhs, we are saying nothing is payable, customer files a case in the court, api court kya decision dega hame malum nahi hai, if court gives decision against us we may have to pay, if court gives decision in our favor we may not have to pay, now this is a proper example of contingent liability, I hope you are getting it, any other example can you think of a contingent liability, now suppose fire occurs and because of fire lot of damages have occurred and some of the curtains are closed, they are sealed curtains, we do not know whether they are damaged or no, and they do not belong to us, they belong to some customer or somebody else, now if inside the package they are damaged we may have to pay compensation, if they are not damaged we do not have to pay compensation, that will be known only when it reaches the customer, customer opens and ask for or not ask for compensation, that can also be a case of contingent liability, I hope you are getting me, now this is a rare case, however for big companies since they are into lakhs of transactions, there are bound to be some or other cases where there would be court cases or such things, they are required to be properly disclosed as per company law, so they will come in notes to account, I am hoping that you are properly reading the balance sheet of your company, I have already told you to select one company and read the annual report of that company, go to the balance sheet of your company, not in the main balance sheet but below the balance sheet there are notes, in the notes there will be one of the items known as contingent liability, where they will have to disclose full details as to the nature of case filed by the customer or filed by any other person, what is the legal advice to the company on the likely charges and so on. Now suppose company accepts the obligation, it will get converted into what provision, if court gives decision against us it becomes a contingent, it becomes our regular current liability but as long as nothing of that is what happens, it remains in the balance sheet as a contingent liability, I hope you are getting me. Now this was our last item in balance sheet liability side, now we will go to the next item that is known as owner's fund, now we have already seen this item when we had seen the format earlier, now this is a residual interest of the enterprise or this is the amount which enterprise or a company has to pay to the owners. Now why it is called residual, because these are your assets, from their assets first you have to pay external liabilities, so you have to pay your both current as well as known current liabilities, that is why owner's fund is considered as a residual interest, if you remember the format of balance sheet earlier it has two components, there is a capital, owners have put in some money that is a capital plus the profits which enterprise gives to the owner that is called as reserves, that capital plus reserve together is known as owner's fund, we can also put it in this way, this is the total of assets minus total of all external liabilities, the balance is called as owner fund, there are two more names to owners funds which are often quoted in press or if you read various information or reports, sometimes they call that net worth of a particular company is 100 crore, that net worth is another name given to owners fund, sometimes it is referred to as equity, so it is said that the equity of company is 500 crore, that equity refers to owner fund, keep in mind this is rather tricky word, there is a type of capital known as equity capital, equity capital, now only equity means owner's fund, so it includes capital plus reserves, now in the American terminology they call it equity, whereas in UK it is called as net worth, in India it is called as owner's fund, these terms are used interchangeably, since in a company shareholders are the owners, instead of owner's fund it is also called as shareholders funds, please go to your balance sheet, it may be shown as shareholder fund or owner's fund in your balance sheet, now many of you might be investing in mutual funds, now if you invest in mutual fund for that scheme every day NAV is announced, NAV, you can search for NAV on Google, they would give lot of NAVs because every day as per the requirements of SEBI, NAV is required to be published, that NAV is also actually owner's fund of that particular scheme, do you know what is the full form of NAV, full form is net asset value, here net asset refers to total assets minus total liabilities, that means it is nothing but the owner's fund for that scheme, so it is the total owner's fund divided by number of units, they calculate per unit NAV and they publish it, anyway since that particular term is often used, I felt that you should know that NAV is also nothing but the owner's fund, now let us go into all the 3 components, now as you know the balance sheet is required to tally or balance sheet is required to match, so total of assets is equal to external liabilities plus owner's fund, now you know that owner's fund itself is capital plus retained earnings or reserves, so owner's fund can be calculated by 2 ways, it is asset minus liability or you can also say it is capital plus retained earnings, now let us go to balance sheet equation, now you all know that A that is asset is equal to L plus O, now if you want to understand how the balance sheet is prepared, we will take five simple transactions and for that transactions try to understand the impact on A, L and O, now let us say a company is newly formed and it issue shares, now can you think of what will be the impact on A, L and O, issue shares means what happens, the prospective shareholders or investors approach the company, they pay money, so company receives cash, gives shares, now can you think of what has happened to ALO, so there is a plus in A, assets go up, no change in liability, owner's fund go up, so A plus O plus, are you getting and if you see in detail we have said plus bank, because bank balance of the company goes up and equity share balance also goes up, so add to bank, add to equity shares, now those of you who are commerce students, you would have already studied journal entries, now what I am showing you is nothing but the journal entries, but just for the benefit of non-commerce people I am not using the terminology journal entry, but in the same way actually journal entries are derived, for every transaction some item of ALO changes and those items actually match, there are equal number of debits and credits, so we will just we are just trying to make it very simple for 5 sample transactions which are very easy transactions, but very basic, most of the transactions of companies are based on these transactions, we are trying to understand the impact of AL and O, are you adding the first one? Issue of share by the company, now the company's form shareholders now next what company has done is company borrows from bank, now what will be the impact on ALO, now I think most of you have guessed it correct, because when company approaches bank, bank sanctions and pays the loan, the bank balance goes up, and a new liability known as bank loan is created, so plus in bank and plus in bank loan payable, so A is plus, L is plus, remember agar 10 lakh ka loan mila hai to loan is added with 10 lakhs, same amount is added in bank, that is why the balance sheet always balances or matches, are you getting the second one also? Now let us go to the third one, first look at 3A, cash purchase of equipment, now company ke pass bohar saara cash aaya hai equity shares ka bhi plus loans ka bhi, so they have decided to use that cash and purchase machinery or equipment, now what will be the impact on balance sheet, how will you reflect it in terms of ALO, company pays cash, so bank balance come hojayaega, but they will receive machinery, so it is plus in A minus also in A, if you go to explanation plus in equipment minus in bank, there is another example which is in 3B, that is collection of debtors, company has already sold some money, some goods to the customers, money is yet to be collected, that is called as debtors, now if the money is collected, company ka balance badaaya or debtor skaya, receivable skajo balance avu gatta, so plus in bank minus in debtors, actually transaction 3A and 3B appears to be opposite, because 3A is a payment, 3B is a receipt, but here we are not looking at payment or receipt, both are exchange of assets, so if you look carefully, neither L is affected nor O is affected, within A only one asset is reduced, other asset is added, so are you getting it, now let us get to 4, now have a look at 4A, company repays bank loan and 4B is payment of creditors or suppliers, now company repays bank loan, what will be the effect, so bank balance will come down, bank loan payable will also come down, if you remember entry number 2, entry number 2 exactly reverse, minus in bank, minus in bank loan payable and what about 4B, 4B is payment of creditors, that means we have already purchased some goods, now we have to pay those vendors or suppliers or creditors, that means our bank balance will be reduced, so minus in bank and minus in creditors, so A is minus, L is also minus, no change in O, are you getting it, see these are very easy entries for those who have already learned commerce, but for those who are doing it for the first time, please look at them carefully, because based on the simple entries actually you can calculate or you can write down any entry, because the same entries are going to happen, they may happen 10,000 times with slight changes, but the base remains same, now go to the fifth entry, now company pays dividend to shareholders, now how it will be reflected, I hope you know what is a dividend, dividend means what happens is company earns profit, now company distributes this profit to the shareholders or to the owners, that is called as dividend. In business cycle you have revenue minus expense you get profit, that profit is either paid to owners or is plowed back or kept transferred back to balance sheet, now we are assuming that that profit is paid to the owners or to the shareholders, now what will be the entry, so bank balance will come down and what else will change, are the assets changing because of bank yes, but no other asset is changing, are the liability changing? No, but O that is from the owners fund there is a reserve, that reserve balance is coming down, so minus in A and minus in O or you can say minus in bank and minus in reserves, are you getting, these were just the simple transactions we can look at hundreds of transactions, but once the basic logic is clear I hope you will be able to understand more and more transactions, so with this we are completing our sessions on balance sheet and in our next class we will start with profit and loss account, namaste, then never.