Introduction to balance sheets

 A lot of emphasis was placed on companies’ revenues and profits during the high-growth phase (FY04 to FY08) as virtually every company was growing at a strong pace.

However, with the events that have occurred in the past 18 months, the focus on the relatively ignored part of the annual report, the balance sheet, has increased. And in the process it has made many investors realise the need of a good balance sheet.

In the past few articles of this series, we have discussed various aspects of a profit and loss account, right from the top line to the appropriation items. In the next few articles, we will touch upon a few of the key constituents of a balance sheet.

What is a balance sheet?

A balance sheet gives a snapshot of a company’s financial strength. The statement shows what a company owns or controls (assets) and what it owes (liabilities plus equity).

The balance sheet is broken into two parts — 'Sources of funds' and 'Application of funds' — as they are called in accounting terminology. We shall first look into the key constituents of the head 'sources of funds', after which we will cover the head 'application of funds'.

Sources of Funds

'Sources of funds' indicates the total financing that a company has done. In simple terms it shows how a company has got the funds which it has used to purchase its assets.

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