Balance Sheet Jargon Simplified

 Balance Sheet Jargon Simplified

The financial statement of any business is like a mirror, reflecting its overall health and performance to all stakeholders. Within these statements, a range of technical terms are used, following established accounting principles, to present an accurate picture of the entity’s position. However, for someone without a background in finance, these terms can often seem confusing. In this article, we break down and explain these key terms in simple language, making it easier for readers to understand and interpret a balance sheet.

 Important Financial Statements – Balance Sheet & Profit & Loss Statement

 Balance Sheet – Statement of assets and liabilities of a concern as on a particular date

 Asset – What the business entity owns

 Liabilities – What the business entity owes

 Assets can be classified into Current Assets, Non Current Assets, Miscellaneous Assets, Intangible Assets and Fixed Assets

 Liabilities can be classified into – Current Liabilities, Term Liabilities and Net worth

 Current Asset – Likely to be converted into cash in 12 months.

Examples – Cash and Bank Balance, Investments, Stock (Raw Material, Stock in Process and Finished Good), Sundry Debtors, Pre Paid Expenses (Insurance Premium Paid, Advance Tax Paid, etc)

Exceptions – 1. Sundry debtors outstanding up to 6 month only are classified as Current Asset, outstanding beyond 6 month are classified as Non Current Asset.

2. Investment in Bank’s TDR are classified as Current Asset irrespective of Period of Deposit.

 Non Current Asset – Previously current, but now not likely to be converted into cash

Examples-Obsolete stocks, Non – Moving Stocks, Sundry Debtors due beyond 6 months 

 Miscellaneous Asset – Advance to employees, Investment in associate firms, Investment in equity shares 

 Intangible Asset – Goodwill, Copy Right, Trade Mark, Patent, Royalties, Licences, Preliminary and Pre operative expenses incurred by the firm, Debit balance in Profit & Loss A/c.

 Fixed Asset – Assets employed for aid in the production process but not used up in the production process.

Examples – Land & Building, Plant & Machinery, Furniture & Fittings, Office equipments, etc. Fixed assets go through wear and tear on their use. Depreciation by Straight Line Method (SLM) or Written Down Value Method (WDV) is applied on these assets every year. Depreciation is a non cash expense to the business entity.

 Current Liabilities – dues of the firm payable within 12 months from the date of balance sheet.

Examples Bank Borrowings (Cash Credit, Overdraft, etc), Sundry Creditors, Advance Payments Received from customers, Term Loan Installments due within 12 months.

 Term Liabilities – dues of the firm Payable after one year from the date of balance sheet. Source for acquiring Fixed Assets, Supporting accumulated losses and raising working capital margins. Examples – Term Loan from Bank & Fls, Debentures, Deferred Credit from supplier of Capital equipments, Deposits from Public (Repayable beyond one year) Term Liabilities are repaid out of Cash Accrual (Profit after Tax + Depreciation + Other Non Cash expense)

 Net worth (NW) – Capital + Reserve + Surplus

 Tangible Net Worth – Net worth – Intangibles

By simplifying these terms, we hope to bridge the gap between complex accounting language and clear, practical understanding. With this knowledge, readers can feel more confident when analyzing financial statements and making informed decisions based on them.