Module 3 Fundamental Analysis

Chapter 6

Understanding Balance Sheet Statement (Part 1)



6.1 – The balance sheet equation

While the P&L statement gives us information pertaining to the profitability of the company, the balance sheet gives us information pertaining to the assets, liabilities, and the shareholders equity. The P&L statement as you understood, discusses about the profitability for the financial year under consideration, hence it is good to say that the P&L statement is a standalone statement. The balance sheet however is prepared on a flow basis, meaning, it has financial information pertaining to the company right from the time it was incorporated. Thus while the P&L talks about how the company performed in a particular financial year; the balance sheet on the other hand discusses how the company has evolved financially over the years.

Have a look at the balance sheet of Amara Raja Batteries Limited (ARBL):


As you can see the balance sheet contains details about the assets, liabilities, and equity.

We had discussed about assets in the previous chapter. Assets, both tangible and intangible are owned by the company. An asset is a resource controlled by the company, and is expected to have an economic value in the future. Typical examples of assets include plants, machinery, cash, brands, patents etc. Assets are of two types, current and non-current, we will discuss these later in the chapter.

Liability on the other hand represents the company’s obligation. The obligation is taken up by the company because the company believes these obligations will provide economic value in the long run. Liability in simple words is the loan that the company has taken and it is therefore obligated to repay back.  Typical examples of obligation include short term borrowing, long term borrowing, payments due etc. Liabilities are of two types namely current and non-current. We will discuss about the kinds of liabilities later on in the chapter.

In any typical balance sheet, the total assets of company should be equal to the total liabilities of the company. Hence,

Assets = Liabilities

The equation above is called the balance sheet equation or the accounting equation. In fact this equation depicts the key property of the balance sheet i.e the balance sheet should always be balanced. In other word the Assets of the company should be equal to the Liabilities of the company. This is because everything that a company owns (Assets) has to be purchased either from either the owner’s capital or liabilities.

Owners Capital is the difference between the Assets and Liabilities. It is also called the ‘Shareholders Equity’ or the ‘Net worth’. Representing this in the form of an equation :

Share holders equity = Assets – Liabilities

6.2 –A quick note on shareholders’ funds

As we know the balance sheet has two main sections i.e. the assets and the liabilities. The liabilities as you know represent the obligation of the company. The shareholders’ fund, which is integral to the liabilities side of the balance sheet, is highlighted in the snapshot below. Many people find this term a little confusing.


If you think about it, on one hand we are discussing about liabilities which represent the obligation of the company, and on the other hand we are discussing the shareholders’ fund which represents the shareholders’ wealth. This is quite counter intuitive isn’t it? How can liabilities and shareholders’ funds appear on the ‘Liabilities’ side of balance sheet? After all the shareholders funds represents the funds belonging to its shareholders’ which in the true sense is an asset and not really a liability.

To make sense of this, you should change the perceptive in which you look at a company’s financial statement. Think about the entire company as an individual, whose sole job is run its core operation and to create wealth to its shareholders’. By thinking this way, you are in fact separating out the shareholders’ (which also includes its promoters) and the company. With this new perspective, now think about the financial statement. You will appreciate that, the financial statements is a statement published by the company (which is an entity on its own) to communicate to the world about its financial well being.

This also means the shareholders’ funds do not belong to the company as it rightfully belongs to the company’s shareholders’. Hence from the company’s perspective the shareholders’ funds are an obligation payable to shareholders’. Hence this is shown on the liabilities side of the balance sheet.

6.3 –The liability side of balance sheet

The liabilities side of the balance sheet details out all the liabilities of the company. Within liabilities there are three sub sections – shareholders’ fund, non-current liabilities, and current liabilities. The first section is the shareholders’ funds.


To understand share capital, think about a fictional company issuing shares for the first time. Imagine, Company ABC issues 1000 shares, with each share having a face value of Rs.10 each. The share capital in this case would be Rs.10 x 1000 = Rs.10,000/- (Face value X number of shares).

In the case of ARBL, the share capital is Rs.17.081 Crs (as published in the Balance Sheet) and the Face Value is Rs.1/-. I got the FV value from the NSE’s website:


I can use the FV and share capital value to calculate the number of shares outstanding. We know:

Share Capital = FV * Number of shares


Number of shares = Share Capital / FV

Hence in case of ARBL,

Number of shares = 17,08,10,000 / 1


The next line item on the liability side of the Balance Sheet is the ‘Reserves and Surplus’. Reserves are usually money earmarked by the company for specific purposes. Surplus is where all the profits of the company reside. The reserves and surplus for ARBL stands at Rs.1,345.6 Crs. The reserves and surplus have an associated note, numbered 3. Let us look into the same.


As you can notice from the note, the company has earmarked funds across three kinds of reserves:

  1. Capital reserves – Usually earmarked for long term projects. Clearly ARBL does not have much amount here. This amount belongs to the shareholders, but cannot be distributed to them.
  2. Securities premium reserve / account – This is where the premium over and above the face/par value of the shares sits. ARBL has a Rs.31.18 Crs under this reserve
  3. General reserve – This is where all the accumulated profits of the company which is not yet distributed to the shareholder reside. The company can use the money here as a buffer. As you can see ARBL has Rs.218.4 Crs in general reserves.

The next section deals with the surplus. As mentioned earlier, surplus holds the profits made during the year. Couple of interesting things to note:

    1. As per the last year (FY13) balance sheet the surplus was Rs.829.8Crs. This is what is stated as the opening line under surplus. See the image below:


  1. The current year (FY14) profit of Rs.367.4 Crs is added to previous years closing balance of surplus. Few things to take note here:
    1. Notice how the bottom line of P&L is interacting with the balance sheet. This highlights a very important fact – all the three financial statements are closely related
    2. Notice how the previous year balance sheet number is added up to this year’s number. This highlights the fact that the balance sheet is prepared on a flow basis, adding the carrying forward numbers year on year
  2. Previous year’s balance plus this year’s profit adds up to Rs.1197.2 Crs. The company can choose to apportion this money for various purposes.
    1. The first thing a company does is it transfers some money from the surplus to general reserves so that it will come handy for future use. They have transferred close to Rs.36.7 Crs for this purpose
    2. After transferring to general reserves they have distributed Rs.55.1 Crs as dividends over which they have to pay Rs.9.3 Crs as dividend distribution taxes.
  3. After making the necessary apportions the company has Rs.1095.9 Crs as surplus as closing balance. This as you may have guessed will be the opening balance for next year’s (FY15) surplus account.
  4. Total Reserves and Surplus = Capital reserve + securities premium reserve + general reserves + surplus for the year. This stands at Rs.1345.6 Crs for the FY 14 against Rs.1042.7 Crs for the FY13

The total shareholders’ fund is a sum of share capital and reserves & surplus. Since this amount on the liability side of the balance sheet represents the money belonging to shareholders’, this is called the ‘shareholders funds’.

6.4 – Non Current Liabilities

Non-current liabilities represent the long term obligations, which the company intends to settle/ pay off not within 365 days/ 12 months of the balance sheet date. These obligations stay on the books for few years. Non-current liabilities are generally settled after 12 months after the reporting period.

Here is the snapshot of the non-current liabilities of Amara Raja batteries Ltd.


The company has three types of non-current liabilities; let us inspect each one of them.

The long term borrowing (associated with note 4) is the first line item within the non-current liabilities. Long term borrowing is one of the most important line item in the entire balance sheet as it represents the amount of money that the company has borrowed through various sources. Long term borrowing is also one of the key inputs while calculating some of the financial ratios. Subsequently in this module we will look into the financial ratios.

Let us look into the note associated with ‘Long term borrowings’:


From the note it is quite clear that the ‘Long term borrowings’ is in the form of ‘interest free sales tax deferment’. To understand what interest free sales tax deferment really means, the company has explained just below the note (I have highlighted the same in a red box). It appears to be some sort of tax incentive from the state government. The company plans to settle this amount over a period of 14 years.

You will find that there are many companies which do not have long term borrowings (debt). While it is a good to know that the company has no debt, you must also question as to why there is no debt? Is it because the banks are refusing to lend to the company? or is it because the company is not taking initiatives to expand their business operations. Of course, we will deal with the analysis part of the balance sheet later in the module.

Do recollect, we looked at ‘Finance Cost’ as a line item when we looked at the P&L statement. If the debt of the company is high, then the finance cost will also be high.

The next line item within the non-current liability is ‘Deferred Tax Liability’. The deferred tax liability is basically a provision for future tax payments. The company foresees a situation where it may have to pay additional taxes in the future; hence they set aside some funds for this purpose. Why do you think the company would put itself in a situation where it has to pay more taxes for the current year at some point in the future?

Well this happens because of the difference in the way depreciation is treated as per Company’s act and Income tax. We will not get into this aspect as we will digress from our objective of becoming users of financial statements. But do remember, deferred tax liability arises due to the treatment of depreciation.

The last line item within the non-current liability is the ‘Long term provisions’. Long term provisions are usually money set aside for employee benefits such as gratuity; leave encashment, provident funds etc.

6.5 – Current liabilities

Current liabilities are a company’s obligations which are expected to be settled within 365 days (less than 1 year). The term ‘Current’ is used to indicate that the obligation is going to be settled soon, within a year. Going by that ‘non-current’ clearly means obligations that extend beyond 365 days.

Think about this way – if you buy a mobile phone on EMI (via a credit card) you obviously plan to repay your credit card company within a few months. This becomes your ‘current liability’. However if you buy an apartment by seeking a 15 year home loan from a housing finance company, it becomes your ‘non-current liability’.

Here is the snapshot of ARBL’s current liabilities:


As you can see there are 4 line items within the current liabilities. The first one is the short term borrowings. As the name suggests, these are short term obligations of the company usually undertaken by the company to meet day to day cash requirements (also called working capital requirements). Here is the extract of note 7, which details what short term borrowings mean:


Clearly as you can see, these are short term loans availed from the State bank of India and Andhra Bank towards meeting the working capital requirements. It is interesting to note that the short term borrowing is also kept at low level, at just Rs.8.3Crs.

The next line item is Trade Payable (also called account payable) which is at Rs.127.7 Crs. These are obligations payable to vendors who supply to the company. The vendors could be raw material suppliers, utility companies providing services, stationary companies etc. Have a look at note 8 which gives the details:


The next line item just says ‘Other current liabilities’ which stands at Rs.215.6 Crs. Usually ‘Other current Liabilities’ are obligations associated with the statutory requirements and obligations that are not directly related to the operations of the company. Here is note 9 associated with ‘Other current liabilities’:


The last line item in current liabilities is the ‘Short term provisions’ which stands at Rs.281.8 Crs. Short term provisions is quite similar to long term provisions, both of which deals with setting aside funds for employee benefits such as gratuity, leave encashment, provident funds etc. Interestingly the note associated with ‘Short term Provisions’ and the ‘Long term provisions’ is the same. Have a look at the following:


Since note 6 is detailing both long and short term provisions it runs into several pages, hence for this reason I will not represent an extract of it. For those who are curious to look into the same can refer to pages 80, 81, 82 and 83 in the FY14 Annual report for Amara Raja Batteries Limited.

However, from the user of a financial statement perspective all you need to know is that these line items (short and long term provisions) deal with the employee and related benefits. Please note, one should always look at the associated note to run through the details.

We have now looked through half of the balance sheet which is broadly classified as the Liabilities side of the Balance sheet. Let us relook at the balance sheet once again to get a perspective:



Total Liability = Shareholders’ Funds + Non Current Liabilities + Current Liabilities

= 1362.7 + 143.03 +  633.7

Total Liability = Rs.2139.4 Crs

Key takeaways from this chapter

  1. A Balance sheet also called the Statement of Financial Position is prepared on a flow basis which depicts the financial position of the company at any given point in time. It is a statement which shows what the company owns ( assets) and what the company owes (liabilities)
  2. A business will generally need a balance sheet when it seeks investors, applies for loans, submits taxes etc.
  3. Balance sheet equation is Assets = Liabilities + Shareholders’ Equity
  4. Liabilities are obligations or debts of a business from past transactions and Share capital is number of shares * face value
  5. Reserves are the funds earmarked for a specific purpose, which the company intends to use in future
  6. Surplus is where the profits of the company reside. This is one of the points where the balance sheet and the P&L interact. Dividends are paid out of the surplus
  7. Shareholders’ equity = Share capital + Reserves + Surplus. Equity is the claim of the owners on the assets of the company. It represents the assets that remain after deducting the liabilities. If you rearrange the Balance Sheet equation, Equity = Assets – Liabilities.
  8. Non-current liabilities or the long term liabilities are obligations which are expected to be settled in not less than 365 days or 12 months of the balance sheet date
  9. Deferred tax liabilities arise due to the discrepancy in the way the depreciation is treated. Deferred tax liabilities are amounts of income taxes payable in the future with respect to taxable differences as per accounting books and tax books.
  10. Current liabilities are the obligations the company plans to settle within 365 days /12 months of the balance sheet date.
  11. In most cases both long and short term provisions are liabilities dealing with employee related matters
  12. Total Liability = Shareholders’ Funds + Non Current Liabilities + Current Liabilities. . Thus, total liabilities represent the total amount of money the company owes to others


  1. Durgesh kumar says:

    Why this lon term advances and loan included in asset side?

    • Karthik Rangappa says:

      Because these are monies given out by the company to debtors and the company expects this to be repayed….when the debtors repay the money it will be in the form of cash or cash equivalents which is an asset. Hence we treat long term advances and loan as assets.

      • Venkatp says:

        It was a very informative website to understand balance sheet for non finance people . I found that in spite of learning a lot about balance sheet I could not apply this learning’s correctly for balance sheet of banks or financial services company. It would be great if you could add a separate chapter about understanding balance sheet / P&L of Banks or financial services companies . Thanks in advance , as I know you will come up with this new chapter 🙂

        • Karthik Rangappa says:

          Glad you liked the website.

          Yes, understanding banks and NBFC financial statements is a little tricky. Its not the best of my strengths, hence have avoided talking about it. Maybe, we could invite someone who will be able to write about this.

    • Varsha says:

      Sir plz can u explain the meaning of two way fungibility with an example for GDRs and ADRs….

  2. J V Indudhar says:

    Simply superb what ever doubts I had till now have been cleared by this single chapter. Thanks a lot Karthik

  3. Masood says:

    As i checked note on other current liabilities, Commission to Non Executive Chairman – 17 Cr, which is around 4.7 % of profit.
    Is it normal in the industry, that they pay such huge commission. I feel this is a bit negative. ?? Please let me know your ideas on this.

    • Karthik Rangappa says:

      Between 2-5% of profits is quite normal. However to get a true sense compare it with Exide to understand how peers are placed. However I would be a bit concerned in case of ARBL. Also, I’ve mentioned about this here, check section 2.4, point 7.

  4. Ajit Kumar says:

    In the balance sheet of Exide Industries (see attachment), we don’t see any Short term of Long term borrowing. But the company do have about 1 Crore finance cost. I was wondering if I want to compare Amaraja Batteries with Exide industries, what data I should pick for short and long term borrowing.

  5. Tilak Shetty says:

    Just a question, why cash rich companies having debt in their books ? ARBL’s books showing debt despite having surplus reserves & cash deposits.

    • Karthik Rangappa says:

      Well a little amount of debt is not bad 🙂 It helps boosting Return on Equity.

      • Arvind Dureja says:

        on contrary it will impact margins, wouldn’t it?
        because of int outgo.

        • Karthik Rangappa says:

          Nope, how would it impact margins? Margins are mainly P&L derivative.

          • Arvind Dureja says:

            are surplus and general reserve cash set aside by company for future?
            if so then why surplus and general reserve are not show under current asset as cash & cash equivalent??

          • Karthik Rangappa says:

            Yes, in fact dividends are paid out from surpluses. Moneies parked under the current assets and liabilities have 365 day window during it will be utilized…clearly General reserves would not fit into this definition.

          • Arvind Dureja says:

            sir if surplus and general reserve are cash set aside by company for future then rolta has over 2000 cr of Reserve and Surplus so why have they defaulted on interest payment of 42 cr??
            quite confusing.

          • Karthik Rangappa says:

            The company should give an explanation for this!

  6. manoj says:

    well actually capital reserves (excluding revaluation reserve) can be distributed (during bonus issue):::
    capital redemption reserve a/c Dr xx
    Capital reserve (excluding revaluation reserve) Dr xx
    Securities premium (earned in cash/cash eq) Dr xx
    Divisible profit Dr xx
    To bonus to share holders A/C XX

    Bonus to share holders A/C Dr XX
    To equity share capital A/C XX

  7. gopal says:

    Question, In they show “debt”. How do they calculate Debt? and should an investor look at debt (or) liability of a company on whole?


  8. DEB says:

    Dear Karthik
    First of all I would like to say that u r really superb!!!!! I have a request if u can elaborate the note no-14 (Inventories).

  9. DEB says:

    I want to see the calculation on note 14 (Inventories). Request you to explain.

  10. mohanraj says:

    Thanks for the detail explaination of balance sheet,but could you take example from moneycontrol bse stock page where the term ” total dept ” is placed in financial’s options.
    i wanted know when the value of total dept is good compared to other term’s in balance sheet side.
    please keep an open mind considering the possibilities of winding up of that particular bse stock, for to my strategy to work i think i am to steps away from completion.
    so i would really appreciate your help on detail explaination for avoiding the possible bse stocks that are threat for winding up,please guide me more on this matter in any way not just balance sheet reference, if you think i need to consider any other condition or step to avoid winding up.
    Thank you for what u have done,ill be expecting a reply.

    • Karthik Rangappa says:

      Please do keep the following points in consideration –

      1) Debt should be low, if the debt is high make sure interest coverage is good (more than 1 at least)
      2) Company should be growing revenues at a good CAGR (15% +)
      3) Healthy margins
      4) Double digit ROE
      5) Good stable management

  11. ajay says:

    Hi Karthik,
    Amazing content on every page ! Thanks !
    Question, pl have a look at the snippet, I don’t understand the “liabilities for expenses” part a sizable part of “other current liabilities” . Is it good? Is it bad? What is it actually?

    • Karthik Rangappa says:

      Ajay – I supposed this is coming form an accounting perspective. Need to get some clarity on this myself. Will get back to you shortly.

  12. Satyajit says:

    First of all – Thanks a lot for this wonderful material, amazing clarity. Will ask you a few doubts , Hope you would answer them ..

  13. Romeo says:

    Respected Sir,
    I had taken loan from a family member and at that time it was shown in liabilities in balance sheet, now I have returned it so that amount has to be shown in asset side ??
    The returned loan amount has to be added to my Capital account ?
    Waiting for your reply.
    Thank You.

    • Karthik Rangappa says:

      Is this your personal balance sheet? I would suggest you speak to the CA about it, I may not be the right person.

  14. ganesh l deshmukh says:

    my question is whether cash credit hypo credit balance add in loans and advances total in Assets side and same show in Lablities side in Deposit head

  15. Asad Affan says:

    Sir, my question is why we add net profit in reserve and surplus and my second question is that every month i pay TDS on rent but by mistake we did pay 1000 less in October month now i paid in Jan-16’s month tell how i will be adjust and what will b entry?? Please!

    • Karthik Rangappa says:

      Balance sheet is used to carry profits year on year, hence we add back this years profits to all the others and maintain it under Reserves & Surplus.

      I cant seem to understand your 2nd question.

  16. rohan says:

    I am getting confused by the term shareholders funds. Please explain what does it means.
    share capital means money that company got by selling shares i.e 170 million?
    how come “reserves and surplus” part of shareholders fund?

    • Karthik Rangappa says:

      Shareholders funds should reflect the funds that belong to the share holders of the company. Profits earned by the company belong to the shareholders and since the profits are accumulated in reserves and surplus (year on year), the reserves and surplus belongs to the share holders funds. Same with share capital.

  17. Anushka says:

    What does the term ‘DEBT’ include? Only long term liability or short term liability as well.
    And how are provisions debt to a company ? They are just cash set aside.

    • Karthik Rangappa says:

      Provisions is not debt – like you said its cash set aside. Debt includes both long term + short term debt.

  18. rani m das says:

    Why hort term provisions are added in P& L account. It has to be deducted right?

  19. Winay says:

    That means Liabilities & profit should be > than the company will be good for investing purpose
    tell the investing sign dear

  20. sidharth says:

    why share capital = FV x Total Shares
    During IPO many companies have face value as 10. but they are listed with higher values
    Eg: coffee day has face value 10, but they are listed as 328.
    here share holders fund is actually 328/share.
    But when we calculating share capital, if we multiplied by face value, share capital is just 10/share. why this contradiction or am I missing any fundamentals?

    • sidharth says:

      I think I got answer for my question. that remaining value higher than face value is “securities premium reserve”.
      Is my understanding right?

  21. Hitesh says:

    What is retained earnings and how can we find it from financial statements?

    • Karthik Rangappa says:

      Retained earnings is the amount the company retains after paying for all the expenses including the finance charges.

      • Hitesh says:

        So in this case will the retained earnings of the company be equal to reserves and surplus i.e. 1345.62 crs?

        • Karthik Rangappa says:

          Retained earnings flows into the Reserves and Surplus and gets accumulated there. Retained earnings is for this year, but the Reserves and Surplus is accumulated every year.

  22. Arvind Dureja says:

    is the shareholders funds kept in a bank or is it being used as working capital?
    what i mean is, should we use shareholders fund as cash or is it how the company has working capital?

  23. Renu Bala says:

    Hi karthik, really liking all your modules.
    one query regarding balance sheet, what changes will happen in balance sheet when company goes through IPO. Lets suppose a fresh issue of 1lakh shares of FV 10rs are issued at issue price of 100 rs . This amount of 1cr raised, where this money will sits in balance sheet?? and also capital arising from 1lakh *10 rs = 10 lakh rs, will this amount sits in share capital??

    • Karthik Rangappa says:

      No structural changes in the balance sheet as such. The share holding obviously changes. Plus the premium over the face-value would sit in the ‘Securities Premium reserve’.

  24. aniket says:

    what does negative reserve and surplus means?

    • Karthik Rangappa says:

      Reserves and Surplus indicates the undistributed profits of the company, which technically belongs to the equity holders. A negative R&S indicates that the company has a negative networth. As a rule of thumb, you have to be cautious about investing in such companies.

  25. Hi Karthik,
    simple but professionally explained. kudos..

  26. Amit D ubey says:

    U are Gopichanda of stock lessons. A number of stock market champions will emerge from zerodha university.

  27. amit dubey says:

    It is your humility. But what is appreciable that u have taken pains to educate laymen about Stock Market in such a methodical manner for free and i have been reading your modules again and again which gives me immense confidence. Earlier it was headlong plunge without having solid knowledge of intricacies of stock market. I bet if you convert the modules into a book it will be one of the best seller . looking forward to such guided material in future too.

    • Karthik Rangappa says:

      Thanks for the kind words Amit, we will continue to do our best to serve the trading/investing community. Please stay tuned for more organized content!

  28. John says:

    How to shortlist the companies as there are 6000 companies listed in BSE and 2000 in NSE and if we go according to the sectors aswell, there also they have a long list of all, so can you please help me to understand that how to shortlist.

  29. Sumit Mochahari says:

    This seems helpful to me

  30. GAURAV LUTHRA says:

    Hi Karthik,
    Thank you for this wonderful module. I have a doubt while looking at a balance sheet, whether we have to look at consolidated balance sheet or standalone? and why? The numbers are different in both the balance sheet.

    What is the major difference between them?

    • Karthik Rangappa says:

      Consolidates takes in the financials of its subsidiaries as well, so in a sense it gives a true and much larger picture of a firm. Hence I’d suggest you take in the consolidated numbers.

  31. Dhinakaran says:

    Karthik, Thank you for the crystal clear explanation. Instead of ARBL, I took DLF for balance sheet analysis. I have few questions. Can you please clarify.
    1) As per the 2016 annual report, securities premium account is 1076038 Lakh RS. How can it be so huge?
    2) I understand, preferential capital is issuing preferred stocks(Wrong?). In 2013 it is 1799 Crores but in 2015 it is 0 which reduced the share capital. Did the company bough back the preferential shares or the contract is over? Why there is no corresponding reduction in reserves?
    3) Also, can i consider general reserves as high liquid cash equivalents?

    • Karthik Rangappa says:

      1) That’s 10K Cr, which is quite large. Have you seen the associated notes for an explanation?

      2) Depends on how the allotment is structured. Most likely they would have bought back. Again, reading the associated notes for this line item for every year starting 2013 will help.

      3) No

  32. vimal says:

    While analysing the Reliance industries balance sheet, I have noticed the share capital in standalone is 3240 crores and the consolidated statement has only 2948 crores. If the consolidated statement gives the whole financial position of the company then why there is decrease in share capital in consolidated statement. I hope you could help me with this..

  33. Aneesh says:

    How to calculate change in debt.. Which is using for FCFE

  34. Krishna says:

    Sir GM, when & why we add TDS on payment to Reserve & Surplus ? and same for depreciation also (Its both are going to add but amount written in minus) pls help thanks

  35. Dhinakaran says:

    Karthik, The interest and dividend income (in other income) in P/L statement – Is this interest and dividend generated from the investing the Reserves and Surplus ?

  36. Manish Parab says:

    hello Karthik , Happy new year to you, thanks for Sharing all this information. I have a doubt regarding ShareHolders Equity, if Asset = Liabilities then Asset – Liabilities = 0 , which in-turn means ShareHolders Equity = 0 ?

    • Karthik Rangappa says:

      Thanks Manish. Wishing you the same.

      Its ‘Assets = Liabilities + Shareholders equity’

      Which makes Share holders equity = Assets – Liabilities.

  37. Sanket says:

    Does the company have all its reserves mentioned above in cash?

  38. James says:

    Respected Sir,

    Need help in a fundamental concept !!!

    ‘Security Premium Reserve’ represents extra amount paid for the shares. Haven’t got this! Sir, please define it with reference (or extension, if required) to your Story in Chapter 4 &5 of Module 1 for conceptual understanding.
    Also, please clarify if that extra amount (premium) points to share price on stock exchange? E.g.: share price for AMARAJABAT=848.15/per share on BSE(4-Mar-17). Does that mean Security Premium Reserve (Extra Price for issues)=(848.15-Real FV)x No. of Shares.???
    If it points to extra price paid during bids in book building process during IPO(if cutoff>bid price), but there you replied in a comment that amount over cut off is refunded ?
    shares were bought later at FV price(not as listed on stock exchange), if yes, who bought common people or … ?
    company issued extra shares later on that were not traded but sold to only some buyers who paid extra (if yes, on what price, FV or listed price on stock exchanges) ?
    (or)… … …???

    Please add a simple equation/formula as well in your example. I hope I have made my confusion/lack of understanding clear.

    Sorry for troubling you on this topic here.
    Thanks a lot in advance.

    • Karthik Rangappa says:

      Security premium reserve is the amount excess of the FV, collected by the company – usually at the time of IPO/FPO. Yes, it is share price minus the FV. However, I’m not too sure about this – I guess an average price over ‘n’ trading sessions are taken for share price.

      • James says:

        Ohhh! ok! getting it a bit !!
        Sir, please just verify once which of my UNDERSTANDINGs (same, but 1- with share price while 2- with FV) below is correct so that i can debug programming of mind clearly @ 1 go.
        That means, if company (during IPO/FPO) issue 1lakh shares of FV 10 & shares are listed on BSE/NSE at 122.20/-, then,
        Security Premium per share = 122.20(share price) – 10(FV) = 112.20/-
        Total Security Premium this time during FPO = 112.20(SP-FV) X 1Lakh (no. of shares sold this time)
        Next FPO (after 8 years) company issues 2lakhs additional shares with FV 5 that were traded @180/-, then
        Security Reserves per share = 180(new Share price) – 5(new FV) = 175/-.
        Total Security Premium this time during FPO=175 X 2Lakh (no. of shares sold this time)
        Security Premium Reserve (in 2016) = (112.20 X 1Lakh in 2008) + (175 X 2Lakh in 2016)

        That means, if company (during IPO/FPO) issue 1lakh shares of FV 10 & shares are listed on BSE/NSE at 122.20/- but firstly bought by institutions/company/merchant bankers/lead managers at FV 15 & then sold by them at exchange to earn profit @122.20/-, then,
        Security Premium per share = 15(bought FV) – 10(issued FV)=5
        Total Security Premium this time during FPO = 5 X 1Lakh (no. of shares sold this time)
        Next FPO (after 8 years) company issues 2lakhs additional shares with FV 5 that were traded @180/- but bought at FV 15, then
        Security Reserves per share = 15(bought FV) – 5 (new issued FV) = 10
        Total Security Premium this time during FPO =10 X 2Lakh (no. of shares sold this time)
        Security Premium Reserve (in 2016) = [5 X 1Lakh (in 2008)] + [10 X 2Lakh (in 2016) ]
        !!! –
        Your one line answer will program my mind firmly !!!
        Thanks for your kind attention to my queries!

        • Karthik Rangappa says:

          Understanding 1 is right. Although, I’m a little uncertain of how the SPR is treated over a long term on the balance sheet. Also, please note the premium is over the issue price and not the traded price.

          • James says:

            Thanks a lot sir for your reply, now it is
            CRYSTAL CLEAR !!!
            Also, I understood here how a company makes real money just selling shares of real monetary value (FV) of 10/- at price of (issue price) 122.20/-.
            WOW!!! That’s really a wonderful way to get deserving (monetary) appreciation of years of hard work.

            Thank you sir & HATS OFF to your efforts (& that of Zerodha Varsity) to understand our queries & reply to it.

          • Karthik Rangappa says:

            Good luck, James!

            Happy reading.

  39. James says:

    Respected Sir,
    Just one more query!!
    as the share price of company increases on stock exchanges, the valuation of company would also have increased, right?
    Where the valuation numbers on balance sheet resides, after all valuation shows company’s financial position?
    Should i ask how valuation of company affect its (which of the) financial statements?

    Thanks a lot!!!

    • Karthik Rangappa says:


      No, ideally, the company should not focus on valuations. Remember, valuation is a bi product and not the main agenda of the company. However, market cap of the company gives you a rough estimate of the size of the company.

      • James says:

        Ohh!! But, can I say that the Valuation affects Revenue (Security Premium Reserves) part of the Balance Sheet when the company undergoes IPO or FPO or issue new shares to public or any investor/s ?
        In that case, “Shareholder’s fund -> Share capital” will increase as per FV (10/-), while “Shareholder’s fund -> Reserve & Surplus -> Security Premium Reserves” will increase as per (share price/issued price – FV) (150.10-10).

  40. MSP says:

    Hi Karthik,

    If Reserve and Surplus is showing negative, this means company has incurred a loss, however , rest of the parameters are good, in this case, which other specific point needs to be looked on, to take a call on the company.


  41. paranthaman says:

    why do an investee company looking out to get invested from a company with more reserves and surplus ?and why cant they accept when the investor have enough balance to invest their needs.

    • Karthik Rangappa says:

      Sorry, I’m unable to figure out the question. Can you please elaborate?

      • Paranthaman says:

        Sorry that i confused u 🙁 , Actually, company mandate has told us to find an investor with 200 reserves and surplus. And we have found somebody with less than 200, that is more than enough for the time , But he refused to accept the investment. is there any way technically he is trying to maintain the bad accounts ?

        i don’t know how to explain more precisely.

  42. Akash says:

    I have two queries:
    1. Why would a company avail loan for its working capital requirement when interest is to be paid by the company and although company is making good profits?
    2. U said “Share capital = No. of shares x FV”. But market cap is defined as “Market cap = No. of shares x Share price”. Does the share capital and market capital differ only in terms of FV and Actual share price only?

    • Karthik Rangappa says:

      1) Sometimes the money could be stuck in receivables etc. In such a case, you will need to avail a WC loan. This is a common practise, especially with manufacturing companies.

      2) Both are different and yes, thats how they differ.

  43. Ayush says:

    Why the general reserve is deducted from the surplus?

    • Karthik Rangappa says:

      Its not deducted, its a part of the Reserves and surplus.

      • Venkatp says:

        Let me thank you for making efforts to create a webpage for explaining Balance sheet / P&L of Banks and NBFC. I am sure it will be up in a short time.
        I have a doubt & request you to kindly clarify the same
        For a company A the long term borrowing(LTB) is shown as 78000 crore and short term borrowing(STB) is 15000 crore. In P&L financial cost is shown as 2500 crore ? I was trying to work out the interest rate of 78000+15000 = 93000 crore on payment of 2500 crore interest — it works out to 2.5% approximately .Even if we consider LTB only then interst rate works out to 3.2 % . Seems to be an erroneous calculation . Let me know how the interest rate is calculate on an approximate basis for LTB+STB

        • Karthik Rangappa says:

          You can capitalize your interest cost. For example check out Hindalco’s balance sheet. Match their debt to interest payment. You will note that they are paying out much less finance charge in P&L. However, when you see the associated note, you will see the actual interest paid.

  44. Kabilan says:

    Hi Karthick,

    Thanks for your effort and time in making this wonderful tutorial. I recently joined Zerodha and very new to share market but I have little knowledge on Accounting.

    I have a question -> 1)Why is the surplus is coming under liabilities, even though the cash is coming in assets.
    I tried understanding a scenario, where the company decides to convert the part of surplus into cash. In such a scenario, Liability will decrease(as amount from surplus is deducted) and cash will increase(which in turn increases assets) causing imbalance in balance sheet.
    It would be a great help if you can help me in understanding this concept.


    • Karthik Rangappa says:

      From the companies perspective, the money in reserves and surplus belongs to the shareholders. Hence its a liability to the company. Expenditure from surplus is usually in the form of dividends and buy backs, which in turn will impact share capital, same side of the balance sheet (in case of buy back)…and in case of dividend, the cash is flushed out. Again balancing the balance sheet.

    • Dhruva Pandey says:

      So reserve and surplus constitutes of retained earning ? and if company wants to return retained earnings it can in the form of dividends and buy backs.

      So, In case of buyback my serve & surplus will go down and share capital will go down as well.
      Something still confuses me is share capital is always calculated in terms of FV but the buyback will happen on some decided market price then how will they balance ?

      Thanks a lot for great educational article.

      • Karthik Rangappa says:

        Rather retained earnings constitute R&S. Yes, that would be in the form of dividends. In case of a bonus, R&S decreases, share cap increases.

  45. Anonymous says:

    What is the difference between shareholder’s fund and share capital. I see the first contributes to the total liability and the second to the shareholder’s equity.

    • Karthik Rangappa says:

      Shareholder’s funds includes share capital and reserves. Share capital depicts how much capital the promoters brought in.

  46. deepak says:

    Sir if assets=liability then share holders equity shall be 0 all the time.

    • Karthik Rangappa says:

      Shareholders equity = assets – liability

      • deepak says:

        As this article mentions assets = liability then share holders equity is zero always.

        Share holders equity = Assets -liabilities
        Share holder equity = Assets- Assets (Since assets=liability)
        Share holder equity=0

  47. Anonymus says:

    Sir how to invest in zerodha and what is the minimum amount if it is allowed?

  48. deepak says:

    1. Sir in case share capital changes from previous year does this also means the outstanding shares have also changed.?

    2. How come a company can raise capital above authorized capital. Is it permitted by the law? If yes whats the purpose of authorized capital.(In case a company issues shares at premium it is inviting more money than it is authorized to).

    3. In case the company is not listed how many equity shares it can have?

    • Karthik Rangappa says:

      1) Yes
      2) Authorized capital can be changed by a board resolution of directors. Also, every corporate action leads to this change.
      3) No restriction as such.

  49. Arghya Das says:

    Hi Suppose Number Of Share Outstanding Is 170,812,500. Is It Including Promoter Group Holding Or It Is The Number Of Share Owned By Non Promoter Participant?

  50. Pradeep says:

    Hi Karthik,

    Thank you very much for the wonderful tutorial. You have made it easy to understand for a non-finance guy like me. Thank you again – for sharing your knowledge.


  51. Amit says:

    If a company reduces its debt (let’s assume 10cr in this FY), where this figure will be reflected in various financial statements? Also where the company arranged the funds to repay the debt.

  52. Maulin says:

    Your tutorials are very simple and easy to follow. I really enjoy learning here.

    I have a question:
    – How is share capital used by the company? Is it just cash that sits there or how is it?

  53. ZQ0852 says:

    Dear sir,
    I have two questions:-
    1) Which is better:- assets>liabilities or assets=liabilities
    2)What is difference between “share holder equity” and Shareholder’s fund


  54. Sweta says:

    Sir ,
    How to identify wether a borrowing or investment is long term or short term?


    Can u plz explain securities premium reserve/account wid a example?
    I find it diificult to understand it.

    • Karthik Rangappa says:

      Let me give it a try – Suppose there are 100 shares, each share is worth 10 Rupees. IPO happens and the stock is listed at 25 Rupee. This means the stock is trading 15 Rupees higher than the notional value. Assuming I manage to sell the stock at 25, I end up making 15*10 = 150 as security premium.

  56. SG says:

    Karthik ji, the way u explained BS is just awesome. U have clarified it entirely putting yourself in the shoe of a non finance back ground reader. Simplest that’s why its best…Keep it up!!

  57. hemanshi g says:

    what is the difference between share holder fund and share capital?

  58. hemanshi g says:


  59. Nagendra says:

    Can anybody give an explanation about Indebtedness and what it includes

    • Karthik Rangappa says:

      This is the debt on the books of the company, which includes both long term and short term borrowings of the company.

  60. Sammandar says:

    Hi Karthik sir
    if intengible asset goes down or decrease then Is it good ?

  61. Sammandar says:


  62. Chakradhar says:

    Hi karthik,
    Please clarify me on the Below query
    1. Capital reserves – where did this amount come from?

    2.Securities premium reserve / account – Is this the amount earned by share holders through equity
    the company had 100 shares;
    face value 1;
    each shareholder has a single share;
    Now the current share value is 10 rupees
    so shareholders have earned an amount of 1000 – 100 = 900

    Am I right?

    3.General reserve – Is this a part of surplus kept aside for sake of shareholders( profit as a percentage for shareholders)?

  63. Akshay Pandey says:

    Why Long Term Provisions are in Liability Section as it the cash left aside for employee benefits?

    • Karthik Rangappa says:

      Any amount that is supposed to be paid out by the company is considered a liability, given this, provisioning is done towards providing for future expenses related to employee benefits.

  64. KUMAR MAYANK says:

    Hello sir
    In the balance sheet, asset= liability. Then what is the meaning of “to strengthen the balance sheet”? I have read this terms many times.
    Thank you

    • Karthik Rangappa says:

      Strength of a balance sheet is defined by many parameters-
      1) The level of debt
      2) Reserves
      3) Net worth
      4) Asset quality etc.

  65. Avinash says:

    Hi Karthik,

    1) In Note 2 : Share Capital, the ‘issued shares’ are 175,028,500 and ‘Subscribed and paid up’ is 170,812,500. Does this mean that 4,216,000 shares are not paid up and will be paid up in future and hence will bring in extra money into the company?

    2) In Note 3 : PAT of current year is added to reserves and out of it Dividend is paid, and also there is a Dividend Tax deducted. My question is since the dividend is paid out of Profits ‘After Tax’ why is a further tax deducted on proposed dividend? What is the government’s rationale behind this tax?

  66. Meenakshi says:

    Amazing information.
    thanks a ton for the efforts.

    Sir you also share videos, Please provide the link or blog/linkedin/facebook.


  67. Reji Paul says:

    Hi Karthik
    Thanks for your great article and sharing the video clips. I have a query on Reserve and Surplus. It was stated earlier that the Share holders’ fund (Equity capital, Surplus and Reserve), which comes under the Liability part of the Balance sheet, normally set aside separately as liquid funds. However, if we go through the Asset side of the Financial statement of most of the companies, it is unlikely to find its corresponding fund as “liquid”. Rather, one can notice that the share holders’ fund has been balanced with Fixed and current asset. In short, the Shareholders fund in the liquid cash form seems to be only “theoretical” and unlikely to encash soon, as one expects. I am not sure whether, my understanding is correct or not. Can you please put your input please?

  68. Kannadiga says:

    Mind boggling content sir , you are simply amazing!!!

  69. ilyas says:

    How can I calculate the surplus of an insurer which is equal to the assets minus the liabilities. What actually includes in assets and liabilities?

    • Karthik Rangappa says:

      Ah, I’ve never really looked into the P&L of an insurance company. This is on my list of things to do and learn :). Will share my learning whenever this happens. Thanks.

  70. Shubham jain says:

    Great work with the modules..!!!

    1 question:
    Let’s say the company is having 100 million INR in reserve and surplus and 1 million outstanding shares, then can we say that shareholder has INR 100/share within the company?
    And if (in this case), market price is 140/share, then can I assume that I am actually getting a share at 40 as 100/share is already reserved as shareholders fund in the company?

    Thanks & regards
    Shubham Jain

    • Karthik Rangappa says:

      Reserves help you in identify the book value of the firm. So the 100 per share is actually the book value. 140 signifies a 40% premium over book value.

  71. chidambaram says:

    Hi Sir,
    1. What is General reserve?Are general reserves are the only money that can be used for future needs of company?
    2. From surplus, a portion of money is embarked to general reserve and paying dividends, then what about the remaining amount
    in Surplus after all these?What the company will do with it? Wouldn’t the company use that for future business purpose?
    3.On Friday,(5 Jan 2017) for IOB,there was a news that the bank is going to write off the accumulated losses with the amount in share premium account.Which i hope to be a negative thing for share holders as the book value would reduce?Hence i was expecting for the share to drop in price but surprisingly the price went up to 5%.Kindly explain on this.

    • chidambaram says:

      Why don’t the company transfer all the money in surplus (after paying dividends ,etc) to General reserve?

    • Karthik Rangappa says:

      1) In a very loose sense, general reserves are money kept aside for future needs of the company. No, this is not the only money that the company can use for futures needs
      2) The remaining is transferred to reserves
      3) Perhaps this was a long stating clarity market needed and to a large extent, market could have already factored in this news.

  72. amit says:

    can company clear its liabilities using surplus or reserves?

  73. Anil dhiman says:

    Thanks zerodha varsity team

  74. Raktim says:

    The profit of the current year as from the example is 367.44 added in the reserves and during the surplus calculation the profit added was 3674.44. How come are they different? And how is the profit being added to both reserves and surplus at the same time?

  75. abhish says:

    Hi sir,

    The content is amazing!

    One question though, is high trade receivable and very low trade payables considered bad thus depicting the company has no MOAT in the market?

    • Karthik Rangappa says:

      High trade receivable is tricky – convey the fact that there is demand for whatever they are doing but at the same time, they do not have much bargaining power. So always match this with sales and cash flow data. Low payables again indicate that they do not have much bargaining power with vendors. But this can also be a decision to pay vendors off soon to maintain a good relationship. So you will have to kind of look at this from a holistic view.

  76. Anurag Chaudhary says:

    i am from non-finance background and hit upon this page while googling for shareholders funds. everything in here is explained in very plain and simple format. very well done. i have now decided to go through the content on Zerodha Varsity rather than doing google for every other query of mine.

    thanks for such informative content.

    • Karthik Rangappa says:

      Happy to note that, Anurag 🙂

      Do let me know if you need any help while navigating through! Happy leaning.

  77. Sunil says:

    Excellent information given in very simple language.Thanks a lot .God bless

  78. l_earn_err says:

    This balance sheet equation Assets=Liabilities is not clear, Sir!
    How can this be even possible?

    Thinking from company perspective, suppose a company gets a loan of Rs. 1000 (liability) and produces output of Rs. 1200 with profit of Rs. 200 (Asset) then how to put this in balance sheet equation??
    1000 = 1200 ??

    • Karthik Rangappa says:

      I understand your concern, let me rephrase it for you 🙂

      The Asset should be equal to liabilities, any difference (either +ve or -ve) is attributable to the net worth of the company.

  79. Akshay says:

    Excellent and Detailed explanation. Will help a lot in reading annual reports. Thanks.

  80. Krishna Yadav says:

    Hi Kartik,
    Please let me know the surplus balance of P&L account treated as reserves or it is treated as separate balance (not including in reserves).

  81. MUBEENA A M says:


  82. Giridhar says:


    Thanks a lot for the amazing content.What is the difference between Debt & Non-Current/Current borrowing?

    Thanks & Regards,

    • Karthik Rangappa says:

      There are long-term borrowing and short-term borrowing, Giridhar. Both represent debt. Long-term is usually debt which is taken and repaid in excess of 1 year whereas the short term is expected to repaid within 1 year.

  83. Pravin says:

    Sir I am looking Amara raja batteries 2010-11 annual report balaance sheet statement in that they mention secured and unsecured load fund …I want fund details in term of Non current liabilities and current liabilities similar to annual report 2016 ….How can I get this details ….??? Or does secured means non current liabilities ….??

    • Karthik Rangappa says:

      Pravin, I guess the Balance Sheet statement was changed sometime around that year. Its now reported as long-term and short-term borrowings.

  84. Kartik says:

    Hi Karthik,

    Thank you so much for the amazing content. Following your stage wise process of stock(company) selection, i was going through the balance sheet of KPR mills ltd.

    I found that data’s shared in one annual report do not match with the data shared in subsequent year Annual report. Why there is so much discrepancy in the audited data?
    eg. in 2016-17 annual report :- total equity on 31st march 2017 is 111806 lakhs, on 31st march 2016 is 98105.
    In annual report of 2015-16 :- total equity on 31st march 2016 is 109419.
    and similarly, all data provided are different.

    what does this indicate?

    • Karthik Rangappa says:

      Any change in share capital implies that the company would have undergone a corporate action like split/bonus etc. Check for this.

  85. Jonty says:

    After reading this, I think I understand the balance sheet better now. But I had a few doubts/questions.

    First, how does one find how many preference shares has the company issued? As from what the balance sheet shows, they have not divided shares into equity and preferred. Second, how does one find out how many debentures have been issued?


    • Karthik Rangappa says:

      I’d suggest you look at the notes associated with the Share Capital, you will get this information.

  86. Amit says:

    Hi sir

    What is exactly equity capital ?
    Where can I find in balance sheet ?

    • Karthik Rangappa says:

      The share capital is also the equity of the company. So look for Share capital on the liability side and also the associated notes.

      • Amit mavani says:

        Hi sir
        Thank you very much for reply
        Below line I read in
        “As a thumb of rule reserve are double of that its equity capital company is liberal to issue bonuses share ”
        So where can I find balance sheet this two figure ?
        Reserve and equity capital

        • Karthik Rangappa says:

          Reserves & Surplus is header within the shareholders equity section, which you can find on the liabilities side of the Balance sheet.

          • Amit says:

            Hi sir

            Still a little confusion

            Reserve n surplus is I found but

            R&S is double than equity capital means
            R&S is double then share capital ?? M I right ??

          • Karthik Rangappa says:

            R&S draws inflows from PAT, so it is more than share capital. But there is nothing like double equity.

  87. Amit mavani says:

    Hi sir

    Plz Suggest me one ratio related to reserve & surplus for easy understanding and comparison to peers
    Like R&s to total share
    R&S to net profit. Etc.

    Again Thank you very much for your valuable reply

    • Karthik Rangappa says:

      Amit, you can always check the Reserves as % of overall liabilities.

      • Amit mavani says:

        Hi sir

        Now two question
        1.only take a reserve or R&S both ?
        2. How much % is good for reserve to overall liability according to you?

        • Karthik Rangappa says:

          1) Both Reserves and Surplus
          2) Hard to take a call on this, Amit. I’d suggest you compare the industry-wide average to understand how the company in focus is faring.

          • Amit mavani says:

            Hi sir

            Grand salute to you for sharing a continuosly valuable information .
            I had never seen any person like you in this market becoz all so called experts r busy in making money while u giving real deep knowledge without money .
            Heartly thanks

          • Karthik Rangappa says:

            Thanks for the very kind words, Amit. Good luck and happy learning 🙂

  88. Amit mavani says:

    Hi sir

    For reserve to overall liability
    Overall liability means current or non current liability only or shareholders fund also calculate?

  89. Amit mavani says:

    Hi sir

    Is it good sign or bad sign for a investor ?

  90. Yasobanta Behera says:

    This is very good that we can learn many more about the Indian Accounting .
    Please update me about accounting rules & procedure , new notification etc.

  91. Ram says:

    Hi Karthik,
    What do you mean by general reserves can be used as a buffer?

  92. MANOJ says:

    very ineresting

  93. MANOJ says:



    Dear Karthik Sir,
    My name is Kalipada Mahapatra, belonging to the state of Odisha and also a member of Zerodha. I have been reading the varsity for the last 6 months and I must say it is a fantastic initiative by you. Lot of things that i did not know about stock market are now clearer to me.
    However, at this point i have a couple questions to ask. Hope i m not bothering you with this 🙂
    Q.1. In the chapter above (6.3) you have mentioned share holder funds. You have also calculated no. of shares by looking at the FV of the stock. My question is what does these nos mean ?? Are these the total no. of shares that the company has released to be held by public (including the promoters) ??
    Q.2. While talking about IPO markets in the previous chapter, you have mentioned that the company keeps some % of the shares with itself to be latter distributed to the public. (Authorized but not allotted.) So when I calculate the no. of shares using the shareholders funds and FV (17,08,10,000 in this case) does it mean there could still be more shares remaining with the company ??
    And if yes, is there a way to find out the exact no. that the company retains ??

    I have tried to read through investopedia website. The language there was so complex, that every thing was way over my head.
    So if you can help me out here I will be very very thankful.

    Kalipada Mahapatra

    • Karthik Rangappa says:

      I’m happy you liked the content on Varsity, Kalipada.

      1) Yes, this represents the entire number of shares outstanding (including the promoters and public)
      2) Usually, for listed companies, the share capital indicates all the shares outstanding. I’d suggest you look at this data.


        Dear Karthik Sir
        This is with regard to Q.2 that i had asked earlier. You have suggested to look at some data. But where is it ??

        • Karthik Rangappa says:

          I was referring to the Share Capital data, which is available in the balance sheet of the company you are interested in analyzing.

          • KALIPADA MAHAPATRA says:

            Dear Karthik Sir,

            I looked at the share capital data of ARBL (FY 13-14).
            It says:-
            (a) authorized (200,000,000 nos),
            (b) issued (175,028,500 nos) and
            (c) subscribed and paid up (170,812,500 nos).
            I understand that the shares “(a) – (b)” are still with the company which the company can issue at a latter date ???

            But there is difference between (b) and (c). So what happens to these shares ? So am I to understand these are the shares that the company has issued but no one has bought it ??? And if that is the case, why does it happen ?? Why no one takes it I mean ??

            Please help me Sir.

          • Karthik Rangappa says:

            Some of these can be in the form of non-convertible debentures, which can convert to equity shares at a later date.

  95. Srikrishna Rowthu says:

    Hi Karthik,

    Zerodha Varisty is helping me a lot in learning as a beginner. Thanks a lot for that. One best thing I see here is, as a beginner, I have lots of questions which are generally explained , how a beginner thinks and also the Q&A allows us to clear our doubts. I truly appreciate your efforts and your team.

    Coming to my question:
    The items listed under “Assets” section, like (Current Investments and Non-Current Investments) etc… , all this money is coming either from Profit(Surplus/Reserves) (or) from Share Capital right? I think so because, as a balance sheet says, money has to come from some person (who is a share holder).
    If it is so, then in that case, at some point, even this money should be given to share holders right , just like reserves/supplies/share capital…

    My second question is,
    The tangible & in-tangible assets come under “Assets” section, but the depreciation & amortization happens on these every year, which is reduced in P&L statement. And the profit is added to “Surplus”. This confuses me.

    Please help me here. Thanks in advance.


    • Karthik Rangappa says:

      Assets are funded by liabilities hence assets are also called ‘application of funds’ and liabilities as ‘sources of funds’. A portion of P&L gets added to liabilities every year and that is how the balance sheet grows. Eventually, everything has to be distributed to both the share and debt holders of the company.

      The D&A that you see in P&L is for ‘the year’, whereas the D&A that you see in the balance sheet (see the associated notes under fixed assets), is carried on from year to year. So the D&A for this year, as seen under P&L is added to the D&A of the previous year. The cumulative figure is what you see in the Balance sheet.

  96. palak says:

    Hello sir,
    I have one query.
    for example Company A is having promoters holding of 75%
    So it has two perspectives:
    a) that promoters believe that the company is having good opportunities and share is undervalued?
    b) that the company can be operated

    Is share dilution must. Can you please explain it bit.


  97. palak says:

    So, if company fundamentals are gud, we can go for it .

  98. palak says:

    Hello sir,

    Can you please explain me how to calcuate MV of debt for the EV. I am stucking in finding it.
    I will be grateful.

  99. palak says:

    yes sir for enterprise value


    Dear Karthik Sir
    In the Share Capital note there are 3 subsections.
    (a) Authorised
    (b) Issued
    (c) Subscribed and paid up

    Sir, can you please explain what does each section mean and how are they different from each other ?? And also, what does it mean when there is a difference between (b) and (c) ???
    Kind regards

  101. Ram says:

    Hi Karthik,
    What are Deferred tax assets?

  102. Himanshu says:

    Typically increase in promoter holding is seen as high confidence from promoter on his company ( hence a buy for other investors). Any scenario where this can have any other implications ?

    • Karthik Rangappa says:

      Can’t think of anything else, Himanshu. Why would he deploy his capital if he does not see prospects improving?

      • Himanshu Pant says:

        I also couldn’t think of any way he could use this to fool investors. But there was a tweet storm couple of days back saying this could probably be done to fool the investors into thinking that the company has bright prospects. Along side he may sell off thereby trapping the retail investors.

  103. Amit says:

    Hi sir

    company having a prefference share is good or bad for investor ?
    How its impact on dividend pay out and dilute equity ?

  104. Kim says:

    The app you have used to explain balance sheet here is very comprehensive. Can you please tell us which application or website is that. Thanks.

  105. Shrey Jain says:

    Hi, I don’t understand the Balance sheet Equation. If Assets= Liabilities, then wouldn’t the Net worth formula be equal to 0.
    As Net worth = Assets – Liabilities

    • Karthik Rangappa says:

      The net-worth part which is the shareholder capital comprising of share capital, reserves and surplus is a part of the liability. So when you look at net-worth, look at the shareholder capital.

  106. Raj says:

    “Think about the entire company as an individual, whose sole job is run its core operation and to create wealth to its shareholders” – Superb explanation!

  107. Ravi Sharma says:

    Hello Karthik Sir,

    I am very thankful to Zerodha and specially to you for teaching us these so nicely. You are passing on these valuable information for free and that’s really sweet and kind of you.


  108. Harinatha Rao S.K. says:

    Hallow Mr. Karthik,
    When a company issues bonus shares to the existing shareholders, are the funds from surplus used towards shares issued and balance sheet is altered to maintain ” Liabilities = Assets”. Please clarify.

    • Karthik Rangappa says:

      Thats right, the balance sheet is just readjusted on the liabilities side. In fact, the same is true with splits as well.

  109. Ajay Deshmukh says:

    Good explanation in a easy and simple way, THANKS….

  110. Pratibha says:

    Hi Karthik,
    I am a beginner in Fundamental Analysis, but your modules are well written and easy to understand for a beginner like me. But, when I come across the Comments section, there are so many technical/ accounting jargons used, which I am unable to understand. Please advise if these jargons and understanding of these Comments are a prerequisite for doing Fundamental Analysis.

    Also, please advise from where to find the Short Term and Long Term Liability as I was going through the Exide Annual Report 2017-18

    • Karthik Rangappa says:

      All the jargons that you need to know are explained in the relevant chapter, Pratibha. So don’t worry about it.
      The liabilities are a part of the balance sheet.

  111. shishir kumar das says:

    Sir in a company baLance sheet reseve is given but surplus detail is not given in notes nor mention on balance sheet.
    Then what should we do in that case.

    • Karthik Rangappa says:

      Maybe there is nothing is the surplus, Shishir. Can you check for previous years BS to get a sense?

      • jayant verma says:

        Maybe there is nothing is the surplus..
        how it can possible, sir?
        reserves are where all the accumulated profits of the company resides as you mentioned.if there is nothing in surplus then what does it mean?
        is it good or bad?

  112. shishir kumar das says:

    Sir what is the meaning of “healthy margin” ?

  113. shishir kumar das says:

    Thank you sir

  114. Madhan says:

    Hi karthick
    Can you please tell two screener to see stock ratio , balance sheet ….?

  115. Madhan says:

    I think it like rare screener somthing

  116. Madhan says:

    Can you please tell one more screener to see stock?

  117. jayant verma says:

    congratulations to the entire team of zerodha for working hard regarding creating all modules in an easy and understandable l manner..i have a question regarding reserves and surplus data of ARBL 2018 Annual report..
    in that report that have mentioned the reserves and surplus data by other equity..also by going through the note surplus data is completely missing ..can you please explain why they haven’t balance provided their surplus data in balance sheet?

    • Karthik Rangappa says:

      Glad you liked it, Jayanth!

      Have you checked associated notes? R&S is an important aspect of the balance sheet, the company will have to share that data.

  118. Chirag Maroo says:

    in other long term liabilities there is a head stating about provision for lease obligation.

    can you please elaborate this part, how one can understand about this liability increasing? and what is the contra journal entry for the same?

    • Karthik Rangappa says:

      Provisioning is basically a term used in the context where a company is earmarking a certain amount of money for its future use. In this case, as the company states, they have a lease obligation coming up, for which they have provisioned. If any liability is increasing, then the asset should increase too. The exact journal entry can be figured by looking at the balance sheet.

  119. Amit mavani says:

    Hi sir
    As u said earlier in one reply to me company have reserve & Surplus in cash form.
    Recently I read in news some company like cox n king have R&S 3773 Cr
    Reliance infra 13912 Cr
    Dhfl. 10087 Cr

    Above company r default in repay .
    How it’s happen ?

  120. Amit mavani says:

    Hi sir
    Can we see this in associated notes or anywhere else?

  121. Amit mavani says:

    Hi sir
    in Cox n king annual report R&S ASSOCIATED NOTE not any specificention whether it’s liquid for or other.
    Can I send a screen shot of it?

  122. Ram says:

    Hey Karthik,
    I was reading through the comments section of this article and I came across a question from Chakradhar in 2017, stated as-
    *”2.Securities premium reserve / account – Is this the amount earned by share holders through equity
    the company had 100 shares;
    face value 1;
    each shareholder has a single share;
    Now the current share value is 10 rupees
    so shareholders have earned an amount of 1000 – 100 = 900
    Am I right?”
    You replied

    So while I was reading this question I got another question that “If the securities premium reserve is where the premium over the face value sits, then the value of the securities premium should only increase when a company files for any IPO or it dilutes its equity”
    Please correct me.
    Thanks in advance.

  123. VenuReddy says:

    Hi Karthik,

    Regarding Surplus 1095.9 Cr, Does it mean Company has 1095.9Cr money in it’s bank account ??

    Thanks in Advance

  124. VenuReddy says:

    Or after trasferring some amount to reserves, Company reinvested the money into plants etc..

  125. Ashwani says:

    if a company X came up with an IPO of its subsidary ,will the shareholders of company X get the share of subsidary ?if not why?

  126. Sanket Sarkar says:

    Is there any relation between shareholders funds and current market price of a share?

  127. ub says:

    what is Securities Premium Reserve

  128. […] You can check the calculation of shareholder’s equity from the example of Uttam Sugar Mills given below. Alternatively you can Click here to know more about shareholder’s equity […]

  129. DS says:

    Hello Karthik sir,
    I’m one of the beginners to stock investing and this is one of the easiest and simplest article which anyone can understand. I have recommended it to my friends as well. Great job for publishing this article for us !

  130. Nikhil Honrao says:

    Will you please tell me which balance sheet should I analyse for fundamental analysis standalone or consolidate????

  131. Janko says:

    Where is the investment made by the person eho started the company shown in liabalities side of balance sheet ?

  132. Janko says:

    Sir, can you please elaborate ? In shareholders equity, Share capital is athe amount which we get when multiply face value by number of outstanding shares, right ? The other part that constitutes Shareholders equity is Reserves and surplus.. so, where exactly is owners investment amount residing ? For eg, if a persons starts a company by investing 1000 crores and at a later stage he lists his company and raises 500 crores through ipo, where will the initial 1000 crores ve shown ? ( 500 crores will be shown as sum of share capital and securities premium account, right ? )

    • Karthik Rangappa says:

      Yes, thats right about share capital. So if I start a company today by investing Rs.100, then the share capital of the company will be 100. Assuming 10 is the face value, then I as the owner will have 10 shares.

  133. Vanessa Jimenez says:

    How do you calculate book value of debt. These are the items I have (would it just be secured and unsecured loans?):
    Secured Loans
    Unsecured Loans
    Deferred Tax Assets/Liabilities
    Other Long-Term Liabilities
    Long Term Provisions
    Total Non-Current Liabilities
    Trade Payables
    Other Current Liabilities
    Short-Term Borrowings
    Short-Terms Provisions
    Total Current Liabilities

    • Karthik Rangappa says:

      Book value of debt is simply the current outstanding loan of the company right? Which is essentially the long term debt on the books.

  134. vinayak says:

    Hello.Can a company use its reserves and surplus to acquire other companies?

  135. Daniel Abraham says:

    Q1.) How is the premium on face value of a share calculated in the securities premium account?
    Q2.) If the short and long term borrowings are not mentioned in the BS, then is the company debt free? (couldnt find it in bata’s AR)
    Q3.) In case of ‘increse or decrease’ can negative symbols be used?

  136. Daniel Abraham says:

    Who pays the premium amount and can this money be used by the company for any purpose?

  137. Abhinav Saini says:

    17.08 crs shares, these are the shares outstanding in the market. What about shares held by promoters, VC or may be PE?

  138. Abhinav Saini says:

    Sir, so you mean, this company allotted all the shares during IPO?

  139. Abhinav Saini says:

    then how can 17.08crs (which includes everthing as you said) be available in the secondary market?
    I checked on moneycontrol website, 17.08crs shares are available in the market.
    Only those shares should be available which were alloted during IPO (just as you said).
    I hope i have conveyed my doubted.
    Sorry, for being slow learner.

    • Karthik Rangappa says:

      Actually, the annual report contains a section called a Shareholding pattern, do check that. You will get to see the exact split.

  140. Arjun says:

    As you mentioned if a company uses only the money pooled during IPO then what use or benefit the company has in rewarding its secondary shareholders? i mean breaking the FV of 10 to FV 1 so that Market cap will increase and liquidity in trades will be happen? why they give bonus and all? pls explain

    • Karthik Rangappa says:

      Bonus and split are all non-cash dividends, which will help the investors in the longer run, Arjun. Do read the first module where we have discussed this in greater detail.

  141. Krishna AG says:

    Hi Karthik,

    Hats off to you and your team for an excellent elaboration on the topic, I found it extremely useful.

    I have a query in Note 9 – Other Current Liabilities. Why is “Advance from customer” categorized under liabilities? Ideally, it is receivable received in advance. Can you help me understand it?

    Krishna AG

    • Karthik Rangappa says:

      Advance is before providing the service/product since it is still dependent on delivery, the company treats it as a liability. If delivered and money is expected, it is receivable.

  142. Himanshu Gupta says:

    Hi Karthik,

    Excellent Work.
    So, I was trying to calculate the number of shares for Relaxo Footwear for FY2019. Here, On-Page 72, for calculation number of shares I’m taking Share capital which is 12.40 cr and Face value is Rs 1(from NSE website).
    No of Shares = Share Cap/Face Value.
    But my No of shares value does not match with any other market source available plus due to this my P/E ratio is not right, not even close. I strongly feel I’m missing something in calculating No of shares.
    Please let me know your perspective in this matter.

    • Karthik Rangappa says:

      No of Share = (Share Cap * 10^7)/ Face Value. 10^7 is basically to convert share capital into Crores.

  143. Himanshu Gupta says:

    Yeah, got it.

  144. Shanmukh Sripada says:

    Hi Karthik! Are ’employee benefits expense’ (salaries & wages, contribution to provident and other funds, staff welfare funds) included in the Balance Sheet? If yes, where are they mentioned? If not, why not?

  145. Hitesh says:

    Shareholder fund = shareholder equity = Net worth of the company
    am i right if not please correct

  146. Ishwar Yadav says:

    why are reserves and surplus a liability to a company .It is the money of the company itself and why capital reserves belongs to the shareholders and they also cannot be distributed to them.

  147. Mikhail says:

    Hello sir, had two queries

    1) From which reserves does the company pay out for dividends, buybacks or while issuing bonus shares

    2) What are revaluation reserves?

    • Karthik Rangappa says:

      1) Dividends are paid from earnings. Rest from general reserves
      2) Business revaluation reserves are reassessment of assets. I need to double-check this as well:)

  148. Indranil Saha says:

    Dear Karhtik

    I have a doubt.

    1) In the Reserve we have the general reserve head.Does this consist of the fund after deducting the divident +divident taxes from the cumulative profit .I mean in Surplus whatever remaining fund is available after deducting the divident +divident taxes from total cuulative profit gets directly transfered to general reserve.

    2)Do u feel divident is an expense for the company.In that wayit should also get accouted in P&L account like Interest and Deprciation.

    Please suggest.

    • Karthik Rangappa says:

      1) Yes, the reserves consist of all earnings post dividends
      2) No, depreciation is an accounting entry, but the dividend is a real cash treatment. Also, it is not an expense, it is distributed from the profits made by the company.

  149. Indranil Saha says:

    Dear Karthik

    Thanks for the response.

    In that case , the entire post dividend earning which comes down to 1095 Cr should have been transfered to General Reserve instead of only 36.7 Cr for ARBL.

    Kindly correct me if am wrong.
    And also what is the use of this Generl Reserve since we already have capital reserve for long term projects.

    • Karthik Rangappa says:

      Yes, that is if the dividends were not paid. Since it was paid, what goes to reserves is the retained earnings post dividend.

  150. Aditya says:

    Hi Karthik,

    How exactly is General Reserve different from the Company’s Cash holdings? I mean a company can use either of them for expansion?

    • Karthik Rangappa says:

      Good question Aditya, I’m not 100% sure here, but if I were to take a guess, to remove cash from Gen reserves, company needs board approval. Besides, these are fund for the long term and strategic investments. Cash, on the other hand, is current. The company can use it to even plus working capital deficits.

  151. Ritwik Guha says:

    Thank you so much for the course you have put out. I am finding them to be very useful and engaging. I have a question on the Share Capital. Share capital is FV multiplied by no. of Shares. But why is it FV? Why should it not be the IPO price at which the public had bought the shares?
    I am actually not at all clear about FV and its significance. Please clarify.

    • Karthik Rangappa says:

      Face value because it is the nominal share price. Face value is also used for all corporate actions.

  152. naveen says:

    Here in reverse
    arbl had 8k cr surplus from previour year of which they moved 300+ cr to reserve. then while totaling it is made 8K+300 . is that correct . we are adding the same amount in reserve and surplus which in reality exists only in one place . consider as having two boxes . one box has surplus from previous year 8k and from it you parked 3k into reserve for this year. so you basically have only 5k in the name of surplus . can you clarify me on this doubt

    • Karthik Rangappa says:

      Take the difference in the surplus for two years and you will get the number. You can match it with this year’s number from P&L and it should ideally match.

  153. sandip says:

    Hi karthik,
    I am really enjoying fundamental modules.Appreciate your hard work to teach us in a laymen terms. 🙂
    I have some following queries please help me with those.

    1) What does it indicates company having (current+non-current liabilities > Shareholders’ funds ). Is it good sign to invest or not?
    2) Why does company takes liabilities if they have more reserves or surplus? Why should not they fulfill their working capital or long term need through reserves or surplus?
    3) Lets say two companies A & B from same sector having following details
    In the initial years,
    For company A : Authorized capital = 10 (FV) * 10000 (#Share) =1 lac
    For company B : Authorized capital = 10 (FV) * 100000 (#Share) =10 lac
    Lets say after 5 years ,
    For company A : Market capital = 30 (market price) * 10000 (#Share) =3 lac
    For company B : market capital = 15(market Price) * 100000 (#Share) =15 lac
    For company A : capital growth = (3 lac/ 1 lac )*100=200%
    For company B : capital growth = (15 lac/ 10 lac )*100=50%
    so here looking at capital growth can we say that company A is worth investing than company B despite company B having Mkt Cap > company A?

    Sorry for the asking too much questions but was little confused about above quires? Thanks

    • Karthik Rangappa says:

      1) Shareholders funds is always a part of the liabilities. In case this component is larger than the rest of the liabilities, it just implies that the company has a high reserves or the equity base is large

      2) Sometimes it makes sense to leverage, especially when cost of funds is cheap. Depends on the company and the sector

      3) No, this depends on the investment strategy. If you are chasing growth then A makes sense and if stability is what you need, then maybe B.

  154. sandip says:

    Thanks Karthik.:-)

  155. Kailash Nath Pandey says:

    Hello Karthik,
    It really is interesting to go through your content on any topics in Varsity. You make it look so easy with your explanations and working example.
    Regarding ‘Securities Premium account’ – It is clear with all the above explanations and questions from other members in the forum that it is the amount gained over and above FV of the share during IPO listing.
    Post-IPO, the share price fluctuates daily and we may have a new share price at the end of FY when it is time to prepare an updated balance sheet.
    Do ‘Securities premium account’ value changes if the last closing price of share at the end of FY is different from its IPO price?

    • Karthik Rangappa says:

      Kailash, this is something I’m not 100% sure. But I do believe that the the 30 day average value of the securties from time of reporting the AR is taken into consideration. Need to double check this.

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