Liabilities in Balance Sheets

As we discussed previously in Balance Sheet post,
Now we have seen the Asset part. Lets look at the Liabilities part of the Balance Sheet.

Liability is a part of the balance sheet which is the part which is 'payable'. Which means that the portion which the company should give back or is supposed to give back. This means that the company might have either taken money from someone or might have borrowed money.

This money can be either taken for running day to day operation or doing some investment for the company of expansion of the company. This decides the nature and the classification of the money used and treated in that way.

In Liability there are three major parts -

Equity
Debt
Current Liabilities.

Overall, the liability portion can be classified in these three categories. Over and above this, there are different areas which add and get reduced as per the nature and requirements of the organization and industry.

The first two parts are called 'Sources of Funds'. This means that they are the ways of raising the money for the organization. A firm can raise money in two parts, Through raising equity of the company and borrowing money in the form of loan, which is 'debt'.

The equity part is basically issuing of shares of the company to people who are ready to give money to company for business. The person who gives money, is given part of company's profit sharing pattern, hence it is called 'share' which is issued.

The debt of the company is the part in which the company raises money, either from banks or investors, or promoters of the company. If there is money raised by giving some security as a 'collateral', it is called 'secured loan'. The money raised without security, or given by promoter of the company is called 'unsecured loan'.

The current part in which the company is liable to pay to the person from whom some business transactions have been done in this current year, are the payable parts which come in 'current liability' of the company. This part has components like creditors, bills payable, etc which are the components which make the current part of the company's workings.

Assets in Balance Sheets

As we discussed previously in Balance Sheet post, there are two components of balance sheet ; Assets and Liabilites.
Among them we would discuss about the asset part in this post.

The students from commerce and MBA education field would find this information useful.

Assets are the components which are owned by the company either in physical form or on paper.
The assets are in short what the company has got in its hand, which can be used to repay the liability if required. Hence it balances the liability.

As discussed, The assets include three major parts

-Fixed Assets
-Investments
-Current Assets

Lets talk about each component of the assets.

The Fixed Assets are the portion of the assets column, which include all the components which can be categorized as fixed in nature. The classical components which fall under this category are Building, Machinery, Land etc, which have the nature of fixed property.

The Investments is the part which includes all components which are investments done by the organization. The organizations purchase of shares of other companies, Investment done in other companies, purchase of shares of other companies are the common examples of investments done by the organization.

The Current Assets incorporate the current savings and income of the company gained within this present financial year. These are the assets which are generally used for the present working of the company. The current assets are also the components which, if are able to be equal or more than 'current liability' of the company, it is considered to be a healthy situation of the company. The common components of current assets are; cash in hand, cash in bank,debtors, work in progress, raw materials, etc.

These more or less form to be components of balance sheet's asset side. The components may add up or get deleted from each balance sheet, depending upon the nature and components required for that nature of business.

For example, if we are looking at a balance sheet of a recruitment firm, we surely wont have any 'raw material' component in the asset side, as it is a service oriented business, and the 'raw material' component is generally referred for a manufacturing business.

Balance Sheet

In accounts and finance world the most important final account considered is the Balance Sheet.
It is basically a document which depicts the financial position of the company. The document is generated generally on the last day of the financial year.

There are two parts of balance sheet; Assets and Liabilities.
The Assets contain all the components which are owned or belong to the organization.
The Liabilities are the payables or components which the company is liable to repay.

The balance sheet gives a correct depiction of what is the current state of the organization. This document is used as a base to evaluate many financial analysis and a platform for many analytics.

The assets include three major parts

-Fixed Assets
-Investments
-Current Assets

The liabilities include three major parts

-Equity
-Debt
-Current liabilities & provisions.


Different accounting standards have defined different formats in which the balance sheet and its components should be represented. However, looking at a larger picture of the balance sheet, these are the pre-dominant components which formulate the balance sheet.

The assets components should be able to equate the liability, which the payment liability for the company. Hence it is called a 'Balance' sheet, wherein the components are balanced.

More clarity will be seen in the coming posts where I would demonstrate a balance sheet with help of a balance sheet example.

Reserve Bank of India

Folks, today I am speaking in depth about the RBI and the functions of RBI in the market. I hope this explanation gives an insight about the Reserve Bank of India.
Reserve Bank of India is the main and core bank of India. It can be called the head that performs different roles of monitoring finance, regulating and controlling finance, guidance and promotion to all finance institutions in India. The RBI institution has come into existence in 1935 and is the core part of the whole functioning of Indian Government.
The operations of the RBI is expanding from time to time and is playing a crucial role in the developments of the country’s economic state with necessary policies, expansions, collaborations and agreements with different financial systems all over the world.
The primary function of RBI is to maintain monetary stability in the market so as to have a maximized profit for the trades. RBI also plays an integral part in the financial aspect of the national and social policies delivered by the government. Take care of the monetary policy and credit policy in the market so that the prices are stabilized.
One of the crucial roles played by RBI in the financial industry is to issue the currency in the market. The RBI is the sole institution which has authority to issue notes and coins which are authorized by Government of India. Next function of the RBI is that it acts as government’s banker. Roles and functions such as deposits, withdrawals of funds by cheques, and making payments as well as receipts. Often in banking world RBI is called the bank of the banks. This means that it is the apex body which takes care and monitors the functioning and credit control of the banks, nationalized banks and co-operative banks in India.
Hence, RBI is a very crucial blood line of the financial domain of Indian government.

Accounts and Finance

Now to begin with, many people have a mindset that finance and accounts are the same. According to many people these two fields belong to a same domain of knowledge. However, the fact persists that these two subjects are alotgether different and have got each area to be explored and learn in its own fashion.

To put the description in simple words, the whole functioning of an organization cannot start without finance. For an enterprise, finance is one the blood line which brings in monetary aspects which mobilize the operations and hence make the business move. However, we can have exceptions to this rule too. There are organizations who have made it successful and have started without and finance or capital.

When the organization takes a momentum, there are daily aspects of monetary mobilisation. Which simply means that there is money required for everything, right from purchase, procurement, transport, delivery, manufacturing, storage, power, safety, deployment and sale. Hence for each of this factor to be incorporated in the functioning of an organization, there are money transactions happening. It is very essential for an organization to have a written record of all the money transactions happening in the whole functioning of the business. This is the step where 'accounts' come into picture. This is the point where the role of 'Accounts' start.

Accounts are primarily the process of recording the daily transactions happening in the business. These transaction are both ways; it is income as well as expenditure record.

Now after putting in the records of all monetary transactions the company also needs a overall picture of all the transactions that have occured in the whole year. Hence at the end of the year, the organization reviews all the transactions and prepares some accounts which give a bird's eye view of all the monetary transactions happend in the whole year. And also they come to know the present situation of the assets and liabilities of the organization. These are called the 'final accounts' of the organization.

The 'finance' domain starts with going skin deep of all these transactions happening in the market. The finance asks question, "Why is this transaction done?", "What is the relation of the spend to the financial position of the company?". These are the areas where the finance domain really starts in the organization's transactions. The finance stream covers aspects like risk allocation, investment, sources of funds, shares, equity, debt, ratios, investment portfolios, market portfolios and many more. We will be looking at each topic in detail ahead, so that the concepts of each topic are covered more detailed.

Basics about Finance

Dear Readers,

I am sure you guys are surfing on the net to find out more depth and insights about the practical aspects of finance. The reason i am starting this blog is to bring about the knowledge about each topic of finance delivered to you in a crisp and practical form. Today many management aspirants are very keen to have a knowledge delivered to them. However, most of the times, all they find is loads and loads of information, and no knowledge as such.

This is my attempt to cover the main topics of finance and put them in front of you in a blog form so that you can refer to the postings when required.

Good luck.

Ameya Nisal