# 6. Understanding Balance Sheet Statement (Part 1)

## 6.1 – The balance sheet equation

While the P&L statement gives us information about the company’s profitability, the balance sheet gives us information about the assets, liabilities, and shareholders equity. The P&L statement, as you understood, discusses the profitability for the financial year under consideration. Hence it is good to say that the P&L statement is standalone. However, the balance sheet is prepared on a flow basis, meaning, it has financial information about 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 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 company takes up the obligation because it 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 obligated to repay.  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 the kinds of liabilities later on in the chapter.

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

Assets = Liabilities

The equation above is called the balance sheet equation or the accounting equation. In fact, this equation depicts the balance sheet’s key property, i.e. the balance sheet, should always be balanced. In other words, 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 :

Shareholders 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 balance sheet’s liabilities side, is highlighted in the snapshot below. Many people find this term a little confusing.

On the one hand, if you think about it, we are discussing liabilities that represent the company’s obligation. On the other hand, we discuss 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 the balance sheet? After all the shareholder’s funds represent 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 how you look at a company’s financial statement. Think about the entire company as an individual, whose sole job is to run its core operation and create wealth for its shareholders’. By thinking this way, you are in fact separating 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 are 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 its 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 the balance sheet

The liabilities side of the balance sheet details 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. In this case, the share capital 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

Therefore,

Number of shares = Share Capital / FV

Hence in case of ARBL,

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

= 17,08,10,000 shares

The next line item on the Balance Sheet’s liability side is the ‘Reserves and Surplus’. Reserves are usually money earmarked by the company for specific purposes. The surplus is where all the profits of the company reside. The reserves and surplus for ARBL stand 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 shares’ face/par value sits. ARBL has an Rs.31.18 Crs under this reserve
3. General reserve – This is where all the company’s accumulated profits, 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, the 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 a 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 significant fact – all 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 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 transfer 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 balance sheet’s liability side 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 a 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 items 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 the note below (I have highlighted the same in a red box). It appears to be some 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 good to know that the company has no debt, you must also question 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 its 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?

This happens because of the difference in the way depreciation is treated as per the 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 will 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 available 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 a low level, at just Rs.8.3Crs.

The next line item is Trade Payable (also called account payable) 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, stationery companies etc. Have a look at note 8 which gives the details:

The next line item 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 company’s operations. 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 are quite similar to long term provisions, 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. 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 Balance sheet’s Liabilities side. Let us relook at the balance sheet once again to get a perspective:

Clearly,

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

= 1362.7 + 143.03 +  633.7

Total Liability = Rs.2139.4 Cars

## Key takeaways from this chapter

1. A Balance sheet also called the Statement of Financial Position is prepared on a flow basis that depicts the company’s financial position 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 the number of shares * face value.
5. Reserves are the funds earmarked for a specific purpose, which the company intends to use in future.
6. The 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 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 concerning taxable differences as per accounting books and tax books.
10. Current liabilities are the company’s obligations 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:

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….

• Karthik Rangappa says:

Can you please elaborate on the context here?

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

• Karthik Rangappa says:

Please stay tuned, there is lot more things coming up on Varsity!

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.

• Karthik Rangappa says:

Ajit – You need to look at the consolidated financial statement. I looked through Exide Annual Report and I have highlighted the required things for you.

• Ajit Kumar says:

Got it. Thank you very much.

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

• Karthik Rangappa says:

Guess you come from an accounting background 🙂

• manoj says:

Science actually…Love the 2d illustrative drawings!!!!

• Karthik Rangappa says:

Nice 🙂

All illustrations are done by a very talented colleague of ours called Gladvin.

7. gopal says:

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

Thanks!

• Karthik Rangappa says:

Debt is on the liability side of the balance sheet. Total Debt is calculated as –

Debt = Long term Debt + Short term debt

• Gopal says:

Thanks brother… u rock 🙂

• Karthik Rangappa says:

\m/ 🙂

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).
Thanks

• Karthik Rangappa says:

Deb – what exactly would you want me to elaborate on?

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 ..

• Karthik Rangappa says:

Of course, we will!

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 ?
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

• Karthik Rangappa says:

Sorry, can you elaborate this a bit – “cash credit hypo credit balance “.

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?

• Karthik Rangappa says:

Yes, they are usually shown as liabilities in the balance sheet.

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?

• Karthik Rangappa says:

Yes, this line item in the Balance Sheet contains the premium.

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?

• Karthik Rangappa says:

Neither, cash is separately mentioned as ‘cash’ in the balance sheet.

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. murali@varsity says:

Hi Karthik,
simple but professionally explained. kudos..

• Karthik Rangappa says:

Thanks!

26. Amit D ubey says:

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

• Karthik Rangappa says:

I’m not worth such an high honour Sir.

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:

Thnx

• Karthik Rangappa says:

Welcome!

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

• Dhinakaran says:

Thank you for the reply Karthik. I will check the notes for more details. So in general, how does a company stores it reserves ?

• Karthik Rangappa says:

I guess they are parked in liquid instruments.

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..

• Karthik Rangappa says:

Maybe there is some sort of corporate action – in such a case share cap and reserves adjust accordingly.

33. Aneesh says:

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

• Karthik Rangappa says:

Change in debt? Where would you need this?

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

• Karthik Rangappa says:

TDS as in tax deduction at source?

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 ?

• Karthik Rangappa says:

Usually from the current investments listed under current assets. Other income can also include rental income.

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?

• Karthik Rangappa says:

Cash and cash equivalents.

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.???
(or)
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 ?
(or)
shares were bought later at FV price(not as listed on stock exchange), if yes, who bought common people or … ?
(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)… … …???

Sorry for troubling you on this topic here.

• 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.
,
UNDERSTANDING 1 –
—————————-
1)
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)
2)
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)
So,
Security Premium Reserve (in 2016) = (112.20 X 1Lakh in 2008) + (175 X 2Lakh in 2016)

UNDERSTANDING 2 –
—————————-
1)
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)
2)
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)
So,
Security Premium Reserve (in 2016) = [5 X 1Lakh (in 2008)] + [10 X 2Lakh (in 2016) ]
!!! –
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:

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!

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?
or
Should i ask how valuation of company affect its (which of the) financial statements?

Thanks a lot!!!

• Karthik Rangappa says:

Yes.

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).
?

• Karthik Rangappa says:

Yes, the initial valuations will certainly have an impact.

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.

Regards,
MSP

• Karthik Rangappa says:

You need to be a bit worried in such situations as the net worth of the company is -ve.

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.

• Karthik Rangappa says:

Guess you will have to sit with a CA along with the balance sheet and other supporting documents for this.

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.

Cheers,
Kabilan

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

• Karthik Rangappa says:

Shareholders equity is an integral part of liabilities.

47. Anonymus says:

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

• Karthik Rangappa says:

I;d suggest you open an account and get started – https://zerodha.com/open-account. No minimum required as such.

• Anony says:

My point is if I want to invest in zerodha company is it possible?

• Karthik Rangappa says:

You can invest through Zerodha, but not sure if you can invest ‘in Zerodha’. As you may know, Zerodha is a private company and not listed.

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?

• Karthik Rangappa says:

Its the total number of outstanding shares.

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.

• Karthik Rangappa says:

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.

• Karthik Rangappa says:

It will reflect in the balance sheet under borrowings. How they arrange for funds will really depend on them!

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?

• Karthik Rangappa says:

Yes, its in the form of cash.

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

Regards

• Karthik Rangappa says:

1) Assets are always equal to liabilities
2) They are the same.

54. Sweta says:

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

• Karthik Rangappa says:

YOu need to check the schedules associated.

55. ARUN MENDIRATTA says:

Hi KARTHIK,
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.

• Arun Lal Mendiratta says:

I think it should be 15×100= Rs 1500??

• Karthik Rangappa says:

I’m unable to spot this, Arun.

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!!

• Karthik Rangappa says:

Thanks for much for the kind words 🙂

Happy learning!

57. hemanshi g says:

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

• Karthik Rangappa says:

Shareholder funds = Share capital + reserves & surplus

58. hemanshi g says:

thanks

• Karthik Rangappa says:

Welcome!

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 ?

• Karthik Rangappa says:

Hmmmm, not really. You will have to inspect why – maybe they have sold off for a great valuation?

• Sammandar says:

if I have to read facebook reports ( B/s, P&L, C/f statement ) then where I can read & understand from ?

Thanks again

• Sammandar says:

I meant where can I inspect from ?

• Karthik Rangappa says:

Look for the note under Gross Block, you should be able to find this. Not sure about US companies.

61. Sammandar says:

thanks

• Karthik Rangappa says:

Cheers!

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
example:
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)?

• Karthik Rangappa says:

1) Transferred from General Reserves
2) Yes
3) Yes, money gets accumulated from the profits made.

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?

• Karthik Rangappa says:

1) Yes
2) This is dividend distribution tax. Note, the dividend at the hands of the receiver is tax-free.

66. Meenakshi says:

Hey,
Amazing information.
thanks a ton for the efforts.

thanks
Meenakshi

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?

• Karthik Rangappa says:

True, Reji. The only representation of liquid cash is cash and cash equivalents. The cash equivalents is usually invested in liquid funds and other such forms. The share capital is certainly not cash form, please ignore it, if I have said so in the chapter.

• Reji Paul says:

Thanks for your swift response and clarification. ?

• Karthik Rangappa says:

Cheers!

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

• Karthik Rangappa says:

Happy learning!

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:

They maintain it under different heads which is broadly called the reserves and surplus.

• 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?

• Karthik Rangappa says:

They can use the surplus to clear the borrowings.

73. Anil dhiman says:

Thanks zerodha varsity team

• Karthik Rangappa says:

Happy learning, Anil!

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?

• Karthik Rangappa says:

I think the company transferred 10% of its PAT to reserves.

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

• Karthik Rangappa says:

Thanks, Sunil. Keep learning 🙂

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??
Asset=Liability
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.

• Karthik Rangappa says:

Good luck, Akshay!

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).

• Karthik Rangappa says:

Krishna, the surplus is transferred to the Reserves & Surplus account in the balance sheet.

ok but surplus is different from reserves, can we treat reserves and surplus are same thing.

• Karthik Rangappa says:

No, they both are different, Krishna.

Thanks dear

• Karthik Rangappa says:

Good luck, Krishna.

81. MUBEENA A M says:

• Karthik Rangappa says:

What sort of help do you need?

82. Giridhar says:

Hi,

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

Thanks & Regards,
Giridhar

• 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?

Thanks.

• 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 reddif.com
“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.

• 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?

• Karthik Rangappa says:

Overall liability. By the way, this was just a suggestion. You can compare this to any header in the Balance Sheet / P&L.

• Amit mavani says:

Hi sir

Overall liability means current and non current liability only ??

• Karthik Rangappa says:

Current + Non Current = Overall liability.

• Amit mavani says:

Hi sir
reserve n surplus negative even company earns profit.
What is means ?

• Karthik Rangappa says:

It means the R&S is getting utilized faster than the profits are getting added.

89. Amit mavani says:

Hi sir

Is it good sign or bad sign for a investor ?

• Karthik Rangappa says:

R&S getting utilized faster than it can get replenished is not a great sign for investors.

• Amit mavani says:

Thank u kartik

• Amit mavani says:

Hi sir
1.is R&S in cash form?
2.if yes then why R&S rich company have too much debt ?

• Karthik Rangappa says:

1) Yes
2) If the debt is easily serviceable by the company then it should be ok. Check the interest coverage ratio for this.

• Karthik Rangappa says:

Welcome!

90. Yasobanta Behera says:

This is very good that we can learn many more about the Indian Accounting .

91. Ram says:

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

• Karthik Rangappa says:

Can you please share the context?

• Ram says:

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.

• Karthik Rangappa says:

Yes, they can use this money to distribute dividends.

• Ram says:

Thanks.

92. MANOJ says:

very ineresting

93. MANOJ says:

excellent

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.

Regards

• 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.

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 ??

• 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.

Thanks
Srikrishna

• 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.

Thanks

• Karthik Rangappa says:

It just means that the promoter does not see a need to dilute more equity, Palak.

97. palak says:

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

• Karthik Rangappa says:

Yup, you can.

• palak says:

Hi,
Sir, what is shares locked in means ?
Does it has adverse impact ?
Thanks

• Karthik Rangappa says:

Its could be locked in due to the preferential issue, ESOPS, or it could simply be under a ban period. No, it does not have an adverse impact.

• palak says:

Okay sir,

Thank you for always being a savior 🙂

• Karthik Rangappa says:

Pleasure is mine!

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.

• Karthik Rangappa says:

MV as in? Market value?

99. palak says:

yes sir for enterprise value

• Karthik Rangappa says:

Let me check this, I don’t recollect doing this.

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

• Karthik Rangappa says:

I’ll try and put up a note on that, Kalipada.

That will be wonderful Sir..

101. Ram says:

Hi Karthik,
What are Deferred tax assets?

• Karthik Rangappa says:

Companies treat the refund of taxes (payable in due course) as 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.

• Karthik Rangappa says:

Hmm, such wild rumors keeps coming up in the markets 🙂

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 ?

• Karthik Rangappa says:

That does not really matter, Amit.

• Amit mavani says:

Hi
Ok thank u

• Karthik Rangappa says:

Welcome.

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.

• Karthik Rangappa says:

The balance sheet is from the annual report.

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!

• Karthik Rangappa says:

Thanks, Raj 🙂

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.

Regards,
Ravi

• Karthik Rangappa says:

Happy reading, Ravi! Keep going 🙂

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….

• Karthik Rangappa says:

Cheers!

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.

• Pratibha says:

Thanks for the reply.. I actually meant Short term and long term borrowings, instead of liabilities. I am not able to locate these in the Balance sheet.

• Karthik Rangappa says:

Ah, the formats have changed, Pratibha. It just gets reported as liabilities now.

• Pratibha says:

Then I hope it should be Current and Non-Current liabilities, please correct me if I am wrong.

• Karthik Rangappa says:

Yes, current is short term, non-current is long term liabilities.

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?

• Karthik Rangappa says:

ARBL has a healthy surplus 🙂
You should look at the associated notes for the details.

112. shishir kumar das says:

Sir what is the meaning of “healthy margin” ?

• Karthik Rangappa says:

Say a double-digit margin like 20-22%?

113. shishir kumar das says:

Thank you sir

• Karthik Rangappa says:

Welcome!

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

• Karthik Rangappa says:

Madhan, have you checked out screener.in?

Ok ok
I think you have informed one more in somewhere in your modules
What is it ?

• Karthik Rangappa says:

As in?

I think it like rare screener somthing

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:

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 ?

• Karthik Rangappa says:

You need to see how the cash in R&S is locked up, maybe it is not liquid.

120. Amit mavani says:

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

• Karthik Rangappa says:

It is available in the annual report itself.

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?

• Karthik Rangappa says:

Thats alright, maybe you should check the associated note of R&S to figure this out.

122. Ram says:

Hey Karthik,
*”2.Securities premium reserve / account – Is this the amount earned by share holders through equity
example:
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
”Yes”

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”

• Karthik Rangappa says:

Thats right, Ram. The premium is generated only when the company’s shares get listed.

123. VenuReddy says:

Hi Karthik,

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

124. VenuReddy says:

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

• Karthik Rangappa says:

Yes, this is possible.

125. Ashwani says:

sir
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?

• Karthik Rangappa says:

Depends on the shareholding structure of the parent company.

126. Sanket Sarkar says:

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

• Karthik Rangappa says:

No relation as such.

127. ub says:

• Karthik Rangappa says:

Its a balance sheet reserve, the premium over and above the face value of the share gets accounted for here.

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 !

• Karthik Rangappa says:

Hey, thank you so much for letting us know 🙂

Happy learning.

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 ?

• Karthik Rangappa says:

Shareholders equity is that.

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
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?

• Karthik Rangappa says:

They can utilize it.

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?

• Karthik Rangappa says:

1) Its driven by the markets
2) Yup
3) Yup but it also depends on the context

136. Daniel Abraham says:

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

• Karthik Rangappa says:

Nope, the money they get is during the IPO only.

137. Abhinav Saini says:

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

• Karthik Rangappa says:

It includes everything.

138. Abhinav Saini says:

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

• Karthik Rangappa says:

Not all, how much ever was earmarked for IPO.

139. Abhinav Saini says:

Sir,
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?

Regards,
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, https://www.relaxofootwear.com/pdf/Annual-Report-final-2018-2019.pdf. 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.
Thanks

• 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.
Thanks

• Karthik Rangappa says:

Good luck!

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?
Thanks!

• Karthik Rangappa says:

No, that is an expense and is included in the P&L statement, under the expenses section.

145. Hitesh says:

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

• Karthik Rangappa says:

Yes, that is correct.

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:

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.

l

• 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.

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. 🙂

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
then
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.
Question
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.

156. pavan kumar says:

why is Long term provisions on the liability side.from where do they get this money.how the balance sheet is actually balanced after adding this.i mean how this is cancelled out on asset side.

• Karthik Rangappa says:

Hmm, aren’t the provisions a liability when you look at it from a company’s stand point?

157. VAIBHAV MITTAL says:

Why is the company’s profit added to the shareholder funds? Ideally, the company pays only dividends to its shareholders, so how does it owe the rest of the profit to the shareholders?

158. Dr yunus lakhani says:

PSU shares had strong balance sheet low debt level there price is still bearish why

• Karthik Rangappa says:

Markets also look at the growth right?

159. Samyak says:

When calculating share capital why are we multiplying with face value ?
Shouldn’t we multiply with LTP since in reality we can get this much value from a share ?

Thank you for your hard work.

• Karthik Rangappa says:

I guess you are confusing this with the market cap of the company.

160. Neel says:

Why sales tax deferment is shown under non-current borrowings instead of deferred tax liability ?

• Karthik Rangappa says:

161. Alan Tellis says:

hello sir, just wanna know if it is true that some companies lie on the P&L Statement…….. and if yes how to know the truth

• Karthik Rangappa says:

Yes, there have been such instances in the past. Very difficult to see through this. YOu need to be fully glued into the sector to know if the sales and operation numbers match up.

162. Alan Tellis says:

thanks a lot sir

163. Netra says:

hi Karthik, I have been learning a lot through Varsity so far. Thank you for sharing your knowledge. I have a question, might sound simple but if assets = liabilities then how come shareholder’s funds be a number greater than zero? assets = liabilities + shareholders’ funds .. so shareholders’ funds = assets – liabilities but assets == liabilities lol .. how come this makes sense? TIA

• Karthik Rangappa says:

Assets – Liabilities = Net worth 🙂

164. krishna says:

Sir since reserves and surplus come under liability which forms shareholders equity and since shareholders equity = assets – liabilities so if shareholders equity is negative so isnt it a good thing?

• Karthik Rangappa says:

-ve is not a good thing, Krishna.

What is a good and bad balance sheet
?

• Karthik Rangappa says:

166. Arun K S says:

As I understand, some money from profit is kept as “surplus & reserved”. What is the complementary effect on assets to keep the balance sheet equation balanced?
For example, if the company needs to add a surplus of 50 Rs, to keep the balance the company needs to increase the asset by 50 rs? Please clarify.

• Karthik Rangappa says:

Cash reserves go up right?

167. Rakesh B H says:

A doubt regarding current liabilities part of balance sheet.
Let us take that the balance sheet is for FY 19-20, prepared as on march 31st 2020.
So according to this, if current liabilities is some 50Cr, does this mean that this much amount of money was already utilised in the financial year before March 31st 2020, to settle the liabilities OR that this much amount is GOING to be utilised within March 31st of 2021 to settle the liabilities?

• Karthik Rangappa says:

Rakesh, the balance sheet is always a reflection of what has happened, it is not forward-looking.

168. Lokesh Parihar says:

How to calculate sale growth and profit growth in percentage

• Karthik Rangappa says:

= (This year sales number / previous year’s sales number )-1

This will give you the percentage change.

169. Himanshu says:

Hi Sir,

For example a company has a market cap of 7000 cr.

It has reserves of 5000 cr and short term borrowing of 1000 cr.
What exactly can I infer from this information??

How do i compare market cap with reserves/borrowing etc?
Or do i need to compare Book value?

• Karthik Rangappa says:

You need to see several other parameters to make sense of this (including book value), but on the onset, it looks like an undervalued company.

170. Himanshu says:

Dear Sir,

What other parameters would I require?
Could you explain or give an example?

• Karthik Rangappa says:

The next module is on Financial modelling, it will have all this and more 🙂

171. Tamizh Selvi S says:

Hi Karthik,
If assets=Liabilities (always) in Balance sheet,can you explain what is the use of calculating “Shareholders equity”.Anyway,when both assets and Liabilities are same,the answer(“Shareholders equity”) will always be Zero only.

• Karthik Rangappa says:

Hmm not really, shareholders equity gives a perspective of what the net worth is, btw, shareholders equity is a part of liabilities.

172. Himanshu says:

Dear Sir,

When is the next module on financial model coming out?

• Karthik Rangappa says:

Hopefully this month the first chapter should be up.

173. Herios says:

Hello Sir,

You have not mentioned how to analyze a banking/nbfc/finserv/insurance company’s balance sheet and ratios.

Ideally these are the best companies to have in ones portfolio.

How does one go about picking which one to purchase as I am extremely confused about their balance sheet.

• Karthik Rangappa says:

I was not too comfortable explaining these hence excluded the same. Hopefully soon.

174. Herios says:

Hello Sir,

Would you invest in any banking/financial/nbfc stock??

On what basis would you invest in them, just curious?

• Karthik Rangappa says:

I would, based on price action.

175. Srikanth says:

“This is where the premium over and above the shares’ face/par value sits.”
I don’t understand this sentence. Can you please explain with an example?

• Karthik Rangappa says:

The ARBL case is the example 🙂

176. kashish jain says:

Sir!
You should have been my accounts teacher in school!!
kudos to you for having done such a great job. <3

• Karthik Rangappa says:

Happy learning 🙂

177. Akhilesh Bagelekar says:

Sir,
My self from civil engineering background trying to understand this module, I have a doubt, mentioned below!
Total current liabilities of FY14 is 6337.03 current means they have to pay with in year! But in profit and loss statement current liabilities were not shown in expense side! Then how this liabilities will be paid off!

• Karthik Rangappa says:

Current liabilities is a balance sheet item, won’t reflect in the P&L statement.

178. saksham says:

Oh man this was so much, i am gonna sleep now and read again later

• Karthik Rangappa says:

Good luck and don’t give up 🙂

179. akmittal says:

If Assets = Liabilities , then In How Book Value Determine = Assets – Liabilities

• Karthik Rangappa says:

Asset = Equity+ Liabilities

Asset – Equity = Shareholders funds from which book value is derived.

180. Pinki Singh says:

what is authorized share capital and what impact it creates.

• Karthik Rangappa says:

Hava shared the details in the chapter itself.

181. Pratik Shah says:

Hi Karthik,

This work is wonderful and neatly explained. Appreciate the efforts taken.
I have one question, I have seen some balance sheets where Non current trade receivables are also mentioned. So when calculating Avg. trade receivables, shall one take the total of receivables and then avg. them with previous year receivables?

Thanks!

• Karthik Rangappa says:

Yes, you need to consider just the current one since the end objective is to figure the number of days for receivables.

182. NAVROZ says:

Dear sir,
The content you upload is very lucid. It helps a lot. Thank you for uploading such great modules.

I have one questions.
If a company takes a loan from a bank for a long term then the installments that the company has to pay in next year from the balance sheet considered current liability or non-current liability?

• Karthik Rangappa says:

Non-current liabilities.

183. Navnith says:

very well written and explained…..Thank you so much

• Karthik Rangappa says:

184. Saurabh says:

Assets = liabilities + share Equity
I want to open a Xerox centre
Case 1. Debt 700 and 300 share. Equity, I buy an automated Xerox machine which needs no employee to operate, so
Assets = liabilities + share Equity
1000 700 300

Case 2. Debt 700 and 300 share Equity,I buy xerox machine(not automated) for 700 and 300 goes to employee expense
Assets = liabilities + share Equity
700 700 300
In this case where will the 300 expense on the employee head will be on the balance sheet equation.

• Karthik Rangappa says:

You buy a Xerox, that adds to the assets, right? Also how did you buy the machine? It is an expense, right?

185. Saurabh says:

My question basically is that when we buy physical asset using say debt we can equate them on the balance sheet equation but
If we consider employees as liabilities, what should we put on the asset side of the equation.

• Karthik Rangappa says:

Yes, you can.

186. CD says:

Dear Sir,
What does this mean?

Securities premium reserve/account – This is where the premium over and above the shares’ face/par value sits. ARBL has an Rs.31.18 Crs under this reserve

• Karthik Rangappa says:

If a 10 Rupee Face value share is trading at 100, then the security premium is 90.

187. Hurry says:

Hello Sir,

From the surplus, after transfer money to the reserve fund + dividend and dividend tax the company still has 1000 cr as a surplus.

What exactly does it do with this excess surplus? Leave it in a yearly FD or something like that?

• Karthik Rangappa says:

Yeah, the company can use it to invest in FDs, liquid funds etc.

188. CD says:

Hello Sir,

HDFC bank is trading at 1492. Its face value is 1. So its premium is 1491?

What exactly does the company do with this money?

• Karthik Rangappa says:

This money does nothing to the company. It creates wealth for shareholders.

189. Dhinesh says:

What happens when a company repays the debt ,it would create a imbalance, having asset more and liability less right?

• Karthik Rangappa says:

No, debt reduces on the liability side, and so would the reserves/cash from asset side.

190. Mr K P Chakrabarti says:

Sir,

In a B/S of a co. there is a huge increase in the Deferred Tax Liability in the current F.Y from the previous one but, they are not showing any profit in their P/L A/C. is it not fishy?

• Karthik Rangappa says:

Not really. Deferred tax liability is basically like provisioning for taxes for the previous year, which can arise out of the way depreciation is treated.

191. babu says:

sir one doubt , where to know about companies revenue model ,how the companies like amazon run across the country what is business model , the company structures ,where can I get these kind of total information about a companies sir to prepare case studies .I searched a lot but know where to get these information so details. can you tell me sir ? any websites u know or some other things!

• Karthik Rangappa says:

Its usually mentioned in the annual report itself. Look for it with the notes associated with the revenue.

192. Babu says:

Sir I am so confused, the day before yesterday reliance industry announced its new project batteries , and JIO NEXT phone . Its a positive sentiment for the company so I assumed yesterday reliance was going to perform good in market but I am so confused ,because it does not perform well yesterday even with a positive sentiment. why sir ?

Is it because of , they announced about spending such a large capital amount on new project is this is the reason sir ? even though that’s good for companies future right ? then why it didn’t perform so well yesterday sir? can you explain me.

• Karthik Rangappa says:

There is no harm in announcing, how much will that translate to earnings is the question.

193. Sunil says:

Hi sir,

A company maintains a general reserve for situations for emergency situations. Does it keep this reserve in a liquid/over night fund to earn interest or just keep it in a saving account?

What about a surplus? Surplus is used to give out dividends, what else can be done with it? Rather just move the surplus to the general reserves?

• Karthik Rangappa says:

These are all maintained in cash equivalent form, usually in liquid funds.

194. Samay says:

Hello Sir,

When I look at a companies balance sheet and see Long term (Secure + Unsecure) debt and short term secure and unsecure debt do I need to be worried?
Should a company have unsecure debt?

Also as long as the debt of a company is substantially less than its general reserve I can always assume that the company can pay of its debt correct? What are red flags I need to see if a company has high debt?

• Karthik Rangappa says:

These are common practises, Samay. Nothing to worry about. Look at the interest coverage ratio, which should give you a perspective.

195. samay says:

Hello Sir,

Unsecure loans is not guaranteed which means a company could default on those loans correct?

Interest coverage ratio shows the ability to service its interest loans, what about its ability to pay of these loans?
Lets say another huge covid lockdown happens and business get shut down. What does the company do to pay these interest and potentially loans?

• Karthik Rangappa says:

That’s right, but usually, that is the last options for the company. The ability to repay depends on the revenue growth. About lockdown, that’s why ensuring companies with good reserves is important.

196. Deepankar says:

I am reading this for the first time about financial statement and absolutely loved your words. I will eager to read more on such topics.

• Karthik Rangappa says:

197. Anu says:

Hello Sir,

When companies take out loans, do they mention the reason they take out a loan? I would only find out about this in the annual report/balance sheet.

What if a company takes out a substantial loan in October or November, I would only know about this till next June/July correct?

• Karthik Rangappa says:

Yes, companies usually report this in advance.

198. Anu says:

Hello Sir,

How and when exactly would a company report this?

Lets say a company like INfy or TCS takes a 5-10 cr loan. Do they report this or only when the sum is very substantial?

• Karthik Rangappa says:

5-10Cr is nothing for a large company. But if its a substantial amount, companies will report it.

199. Sai Krishna Praneeth Duggirala says:

Can you elaborate more on Securities and Premium account ?

• Karthik Rangappa says:

I’ll do that in the current module on Financial Modelling.

200. Karthikeyan R says:

Securities over premium is defined unclear. It would be clear, if you had mentioned that the premium over the face value when the shares issued.

201. Joydhro says:

How many equation are there for solving reserve and surplus in debt to equity ratios.

• Karthik Rangappa says:

Debt to equity is just one ratio, no equations as such.

202. free_spirit says:

On Note 7 & 8 in the beginning there is mention of “(Secured)” & (“Unsecured”). What does it mean?

• Karthik Rangappa says:

Secured debt is a credit against collateral, unsecured is issued without any security.

203. free_spirit says:

Okay. Thanks a lot!

204. Pavan says:

is there any specific purpose of reserves and surples? I think they both are used to same purpose for future use right?

• Karthik Rangappa says:

Thats right.

205. Sachin_Learner says:

Hi,
How can one know about the agreements(details like maturity period and more) related to the preference shares that a company has issued? (I mean, what kind of a preference share it has issued, like, say, convertible and redeemable and etc.)
– For the above question, I have received answer saying that the details will be be represented in the balance sheet with the corresponding note number but unfortunately I cannot find any details. So any ideas about it ???

• Karthik Rangappa says:

Do check the annual report, usually, companies have a dedicated section on the share holding pattern which will have all the info.

206. NAVEENKUMAR says:

Good Morning Sir,

How does the Face value of the company (Rs. 1, 5, or 10) is calculated during the IPO, and how does it differ from book value. Kindly clarify. Thanks!

• Karthik Rangappa says:

The face value is a nominal value created at the time of taking forming a company. But the book value is dependent on the profitability of the company.

207. SAI KUMAR says:

• Karthik Rangappa says:

I’ve never looked at one, but I guess it’s fairly straightforward, and follows the same pattern as discussed here.

208. Rashmi Kumari says:

What is FVTOCI reserve? If it decreases, what could be the possible reason behind it?

• Karthik Rangappa says:

Not sure, Rashmi. Need to check this.

209. Rajesh says:

If reserve and surplus belongs to shareholders can it be distributed among shareholders as dividend.

• Karthik Rangappa says:

Yes, dividends come from the R&S amount.

210. Garry Kevin says:

A company buys land using shareholder’s equity. The value of the land increases.

How does the balance sheet balance ?

• Karthik Rangappa says:

Will reflect in the fixed assets of the balance sheet.

The reason why the amount in general reserve is not shown under cash/cash equivalents is because general reserve is basically the profits that get added as reserves to meet future needs (e.g company expansion etc). Since these are essentially profits it is treated as an equity component and belongs to the shareholders. Cash and cash equivalents involves cash generated by the business through its operations as well as investments. For example, sale of goods will result in cash inflow and thus will add on to the existing cash balance. Try going through the cash flow statement to see how the year-end cash balance is arrived at. It will show how business activities (operating, financing and investing) generate cash.

Answer to Garry Kevin – When an asset (say land, building etc.) increases in value subsequent to its purchase (say after one year the value increases), then that increase is called a revaluation gain which will be recognized in the P/L statement. And as Karthik perfectly pointed out how the P/L interacts with the balance sheet, we see how it balances.

Note – Assets are shown at their carrying value in the balance sheets. Carrying value means original cost minus accumulated depreciation. There is another concept called the ‘fair value’ which is basically the market price of the asset. When the company revalues its assets based on the fair value, the value of the assets will increase/decrease, thus creating a revaluation gain/loss accordingly.

• Karthik Rangappa says:

Thanks for pitching in that bit, Pradeep 🙂

Thanks Karthik. Can’t thank enough for what Zerodha is doing for the community. I look forward to seeing this platform grow even bigger. I’m trying to add in my responses wherever I can. I wish I could be a part of Varsity writing team.

• Karthik Rangappa says:

I hope so too, Pradeep. Every comment enriches the platform 🙂

214. Swaroop Kukke says:

Hello,
I didn’t quite understand why the ‘Reserves and Surplus’ come under Liabilities? Since these are accumulated from profits over last and current year, shouldn’t this be treated as assets?
Thanks

• Karthik Rangappa says:

The R&S funds belong to the shareholders of the company, hence from the company’s perspective, this is a liability to the company.

215. sarves says:

Sir, can u please explain what is the purpose of (Securities premium reserve/account) a little more !

216. Jacob Tony says:

Hi Karthik, Commission to the Non Executive Chairman is included in the Balance sheet under “Other current liabilities” and also under ‘Other expenses’ in the P&L Statement (Note 24 of https://zerodha.com/varsity/chapter/understanding-pl-statement-part2/). And the amount mentioned is the same.. Is this redundant to be recorded under both the sections? Please elaborate. Thanks in advance.

• Karthik Rangappa says:

Ah, it is usually a P&L line item, gets clubbed under expenses. Let me check this again, not sure about the Balance sheet part.

217. Tamizh Selvi S says:

Hi Karthik,
I am looking into a stock of a travel agent.Here,in the non-current liabilities, only contract liability is mentioned,should this be considered as “long term borrowing”.Please clarify

• Karthik Rangappa says:

Before considering that as long-term borrowings, please get into the associated notes and read the nature of this liability. If its long term in nature, then yes, you can consider this as a long-term liability.

218. Pavan says:

Sir,
How can find total debt of the company and which part do we need to see for this in financial statements?

• Karthik Rangappa says:

Please check the balance sheet of the company, you will long the long and short-term debt mentioned on the liabilities side.

When there is increase in share value of a company in share market, how is that treated in balance sheet and against which item on the asset side or liability side is it balanced in balance sheet?

• Karthik Rangappa says:

The increase in share price does not have any implication on the company’s balance sheet.

220. Roshan says:

Good morning sir,
What is
1. Additional paid in capital ? . What it is signify ?. It’s good or bad
2. What is goodwill ? What it is signify ?. It’s good or bad
Thanks.

• Karthik Rangappa says:

1) It happens when the company decides to raise more capital
2) Guess I’ve explained this in the chapter itself, can you please check again?

221. Roshan says:

Thanks
1. Sorry sir I didn’t followed
2. Ok sir will check

• Karthik Rangappa says:

Sure, good luck!

222. Roshan says:

• Karthik Rangappa says:

Roshan, additional paid-up capital is when the company issues new shares. Usually, at a price higher than the face value. This is similar to the securities premium reserve in the balance sheet.

223. Samir says:

Hi, How can a company spend the securities premium reserve? The stock price of the company changes daily and it is traded on daily basis. Suppose the price of the company falls by 50% and the company has already spent more than 50%, how will they account for that extra money spent. Please clarify, I am quite confused.

• Karthik Rangappa says:

Security premium reserves is created at the time of IPO issue. It does not change on a day-to-day basis.

224. Mayank says:

Are other current liabilities the one which is not related to the core operation?

• Karthik Rangappa says:

Nope, they are. Check the associated notes for more details.

225. TEJAS says:

Hello sir.First of all I am really glad and thankful for proving all this information.I tried to apply this some companies like SBI bank, and Kotak Mahindra bank and I was so confused.I was fraustated that maybe I did not focus properly reading but then I read first part of balance again and tried to apply again but then I realised that total format of banks is different then I applied this to other companies like divis labs.then I worked so please explain how to Read FINACIAL STATEMENTS OF BANKS…thank you sir

226. Vignesh says:

• Karthik Rangappa says:

Vignesh, can you please repost the question? Looks like I missed it.

227. Darshan Kapasi says:

How come provident funds come under Long term provisions? We have already considered it in expense part of P & L statement and profit is evaluated after considering it. Then why again to put it in liabilities?

• Karthik Rangappa says:

If its mentioned in BS, then maybe you should check the notes once for an explanation from company’s perspective?

228. Chilesh says:

Sir what’s the difference between retained earnings and surplus

• Karthik Rangappa says:

Both go into the balance sheet under reserves, Chilesh. Not much difference.

229. Shashank says:

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

Assets = Liabilities”

Can you please explain why this needs to be the case?
Thank you

230. .ahalingam says:

Some of the companies like TVS motors shreecement TTK prestige keep a very low equity but high on debt?
What is the advantage except EPS?

• Karthik Rangappa says:

They may need debt financing for their capex cycles. You need to read the AR to figure why they have such a structure.

231. Manoj says:

Hello sir
thanks for the wonderful understandable material
i wanted to understand the share capital here ,
here the share capital = No of share * FV
But when company issues share ,it issues with a issuing price
So where does difference in the money gets accounted ? the difference between (issuing pirce – FV)

• Karthik Rangappa says:

It goes to the security premium reserves.

232. Mangesh Baxi says:

There is a typo here in this line I think : “It is interesting to note that the short term borrowing is also kept at a low level, at just Rs.8.3Crs”. The actual figures are 83.83 Crores.

• Karthik Rangappa says:

Ah, let me recheck this.

233. CHIRAG says:

Hi Kartik.
Could you please explain, Securities premium reserve from customer perspective. I can buy a share fropm open market then why would I have the need to get a share on face value + premium? Face value. + Premium can be cheaper than current value of share in open market and therefore can I not just buy on face value + premium? That seems wrong.

Therefore confused on Securities premium reserve. Any clarification?

• Karthik Rangappa says:

Security premium reserves are on the balance sheet of the company. Suppose a company issues an IPO and the cut-off price is 100, but the face value is 10. Here, 90 is termed as a premium, which goes into the Reserves & Surplus section (under the header of security premium reserve) of the company.

234. Kamal says:

Why is Shareholders equity not 0 if assets = liablitiies?
This seems confusing

• Karthik Rangappa says:

The difference between assets and liabilities = Shareholders’ equity. If its 0, then there is no shareholder’s wealth.

235. Niraj says:

What is difference between borrowing shown in balance sheet and borrowing shown in finance cash flow.

• Karthik Rangappa says:

Borrowing remains the same, Niraj. Treatment is different.

236. Niraj says:

Means borrowing shown in balance sheet is fixed.
And proceed from borrowing shown in cash fin activity is money use from total borrowing.

• Karthik Rangappa says:

I’d sugges you read through till cash flow statements to understand how these statements interact. We have videos as well.

237. Niraj says:

Means borrowing shown in balance sheet is total borrowing of company.
But proceed from borrowing in cash fin activity means money used from total borrowing.

238. Niraj says:

Sir l just want to know what proceed form borrowing and repayment of borrowing explain us in cash finance activity.

• Karthik Rangappa says:

So there is no cash finance activity as such. From a cash flow perspective, there is operations, finance, and investing activity. Not sure which one you are referring to.

239. Niraj says:

In finance activity there are two column one is proceed from borrowing and other is repayment of borrowing.
what these column show in finance activity?

• Karthik Rangappa says:

These are borrowing funds and repayment, pretty much as the name indicates, Niraj.

240. Niraj says:

OK sir 👍

241. Hemant Kumar says:

I have several questions based on your explanation using ARBL example:

1- Are reserves real cash or just account entries?
2- If companies apportion surplus funds for just dividend payment or tax on the same, what about other requirements for day to day operations such as changes in working capital requirements?
3- Where does cash or cash equivalents or investments on the asset side come from if not from reserves?
4-What do companies do with their general reserves if they don’t have any use for them? Do they invest them in liquid or long term funds or just keep them in the bank? Or again is it just an accounting entry?
5- You said general reserves are used for buffer? Buffer for what? Isn’t that the purpose of keeping surplus funds in the reserves?
5- Similarly what do companies with their surplus fund while they are not being utilized?
6- Is there a book or link you can recommend where I can get into more details on utilization of reserves in the balance sheet and how the interact with cash flow statements? For example for some companies their cash flow statements show significant investments in mutual funds, bonds or other companies which are more than just the PAT-dividend. So I’m assuming that some of that investment represents reserves on the balance sheet but I’m not sure.

• Karthik Rangappa says:

1) Real cash
2) Surplus can be used for anything
3) They are investments made earlier now treated as assets
4) Its a statutory requirement (need to double-check as well)
5) They can make investments in liquid funds or GSec
6) You can pick up any BEcom finance book to understand how B/S works

242. Raghu Ram says:

Karthik sir, The ARBL Example is relates back to 2014, Now the Companies have updated with Indian Accounting Standards(Ind As) whose accounting concepts which is far Differential from Accounting Standards (AS). I’m asking from curiosity when the Example(ARBL With Financials of 31.03.22) would get updated. Thanks.

• Karthik Rangappa says:

Raghu, the objective was to showcase the techniques used to evaluate a company and do FA. But that said, yes, I agree formats have changed. I’ll see if I can do something about this.

243. Samarth Arya says:

Sir, if assets and liabilities are always equal, then their difference should be zero correct ?

Then how come shareholder equity is asset minus liabilities.

• Karthik Rangappa says:

The difference between the assets and liabilities is the net worth of the company, Samarth.

sir when can we expect a detailed write up for understanding balance sheet pnl financials of banks and nbfc

• Karthik Rangappa says:

Anupam, thats been on cards for a while now, will try and do that.

245. Sathish says:

Sir, I’m currently analyzing a fintech company, the balance sheet of which doesn’t have current/ Non current assets or liabilities. Instead I see only financial and non financial liabilities/ Assets. I even checked the latest annual report. No further details. I want to calculate ‘capital employed = Total assets – current liabilities’. So want to know current liabilities. How do I proceed? Thanks.

• Karthik Rangappa says:

Sathish, can you inspect the notes associated with the border line items? It must be stated in the notes.

246. Sathish says:

Yes sir. Finally found it. It was hiding inside the annual report notes. Its strange that I have to wait for 1 year to know the updated details rather than a quarterly update in balance sheets. Thanks a lot!

Can we look forward for a future update on Varsity modules regarding analyzing banks/ NBFCs and forensic analysis?

• Karthik Rangappa says:

The balance sheet is updated half-yearly. About banks and NBFC, yeah, will do that soon 🙂

247. Ankitha says:

Sir, if assets = liabilities, then Owner’s capital will be zero according to the equation OC=assets-liabilities.
So does this make sense? if yes, can you please explain it sir?
Thank you

• Karthik Rangappa says:

Assets should be equal to liabilities, the difference if any, is the net worth of the company 🙂

248. kris says:

sir you wrote shareholders= assests- liabilities. But the correct one is Asset= liability+shareholders. what do you say sir. Iam I wrong if so please correct me. Thankyou

• Karthik Rangappa says:

Its the same if you rearrange the equation 🙂

249. Dhiraj says:

Hello Sir,
As mentioned above the Assets and Liabilities for a given company is always equal. The same is seen in the balance sheet. Then how is Shareholder’s equity (Assets – Liabilities) calculated? Is it we need to consider the difference between current assets and liabilities?

Thank you.

• Karthik Rangappa says:

The difference is the net worth of the company, Dhiraj.

250. Sathish says:

1. I am seeing that the contingent liabilities are higher for banks, even for HDFC bank. Is it normal if contingent liabilities are higher in case of banks? Should I ignore this?

2. Assume your selected stock made a huge rally. You have always stressed on the importance of exiting based on both fundamentals and technicals. But you might have come across stocks where the fundamentals despite being strong enough are getting broken down after making a huge rally. This might also be due to poor growth expectation or some insider news that retail investors will never know. Assuming there is no information even if you dig further, I would like to know, how you would approach such a situation. Save your profits and exit or wait?

Thanks sir. Currently reading the sector analysis module and is very helpful.

• Karthik Rangappa says:

1) Its on the higher side. By the way, we will soon publish a chapter on understanding banks as a sector, maybe that will help
2) One of the best things to do in such situations is to ride the profit. You can use the technique of trailing stop loss 🙂

251. Ashok says:

Hi Karthik, One small correction. At the end of this blog, that is before the “Key takeaways from this chapter” section the total liabilities has written as “Rs.2139.4 Cars”. Do change the cars to crores. Thanks for putting lot of effort to write these amazing blogs😊

• Karthik Rangappa says:

Thanks Ashok. Will do that 🙂

Hi, karthik sir.
Could you please clarify the below , Iam confused regarding “EQUITY SHARE CAPITAL”

(in crores)

Particulars                                      31 march2021

Authorised capital                             83

83,00,00,000(as 31st
march-2021) equity
Shares of rs 1/-  each                             –
fully paid.

Issued,subcribed &fully                        41.2429
Paid-up shares

41,24,29,000 (41,24,29,000-
as 31st March 2021equity         41.2429   Shares of rs 1/-
each fully paid

• Karthik Rangappa says:

Which part is confusing, Shaik?

I understand what is authorised capital
But my question is? from above
Authorised shares = 80 crores shares
Issued shares = 41,24,29,900 shares
Retained authorised shares
(not issued to anyone)= 332,429,900 shares
Why retained authorised shares are not carried in “SHARE CAPITAL” segment in balance sheet.where issued share capital is carried on “SHARE CAPITAL” .
Thank you

• Karthik Rangappa says:

Share capital is issued capital and fully subscribed. We will be making a video on this shortly.

254. Rohit Kumar says:

Issecurity premium is shown in reserve and surplus

• Karthik Rangappa says:

Yes, thats right.

255. Anshumay says:

Why is reserves & surplus considered liabilities not assets?

• Karthik Rangappa says:

From a company’s perspective, it is a liability as the R&S belongs to the shareholders of the company.

256. Neeraj says:

Sir in some company we see that reserve is negative what is reason behind these

• Karthik Rangappa says:

That is because the company is not being profitable 🙂

257. Bharath K says:

Sir I have a doubt in the long-term borrowing line heading. Mostly these will be term loans. Term loans are expressed in EMI (Principle + Interest) Component. Since we would have already deducted the interest component for 12 months in the P&L account for that said period, then will the remaining total debt, after deducting the 12 months interest be expressed as long-term borrowings. Is my understanding correct?

and my second question is on the Securities premium reserve / account . is that premium amount during the issue of shares or it is the premium above the current market capitalisation. (Difference between Current market capitalisation and face value of the shares outstanding)

• Karthik Rangappa says:

So most companies issue bonds or borrow in a bond like structure, hence EMI wont be relevant.

Yes,security premium is during the IPO time.

258. Bharath K says:

Thank you, sir.

• Karthik Rangappa says:

Good luck!

259. Sathish says:

Both HDFC bank and ICICI bank has extremely high contingent liabilities. Is it like the normal case for banks. I don’t understand as to how to interpret this? Could you give your opinion. Thanks.

260. Sathish says:

I guess, You have already pointed out to this chapter before for a similar question. I did check that time. And also I gave this chapter a full read now as well. Its very well written. But unfortunately, there are no details in relation to contingent liabilities.
Usually high contingent liabilities are seen as a red flag. But in case of big banks, contingent liabilities as a percentage of total networth is multiple times high. I couldn’t understand, how is this normal. Tried my part on researching. No clear answer.

261. Sathish says:

I guess this is the same link you referred to in your previous reply sir. I’m also referring to the same link only. I couldn’t find anything in relation to contingent liabilities. I gave this a read fully.

• Karthik Rangappa says:

Sorry, then can you post a comment in the chapter, my colleague Vineet will get back to you.

262. amit says:

why reserve and surplus is on liability side ?after all it is the money that is kept by company.

• Karthik Rangappa says:

They are a liability from the company’s perspective as the funds belongs to the shareholders and not to the company.

263. Kanav says:

Hi Karthik

First of all this is such a well written Doc so thank you so much. I am usually someone who is very curious and its very for me to get stuck if I don’t understand the concepts in entirety but Varsity covers everything.

From Financial analysis to fundamental this seems to be my first doubt :

– In the snapshot you updated to fetch 1Rs FV of the share , the share price of the company is Rs 634 . If share capital = FV * No of Shares . The remaining premium/incrementality in the share value from 1 Rs to 634 should reflect under Securities premium account correct?

– The total amount if you multiply 17,00,00,000 shares from 634 comes out to be more than 10,000 Cr but that doesn’t get reflected anywhere

• Karthik Rangappa says:

Glad you liked the content, Kanav. The premium resides in the security premium reserve, but this is at the time of going public. The share price that you see is driven by market valuation.

The market cap captures that right?

264. Ashay says:

sir how to calculate for this in crore
example :
RS in ‘000
Net cash flow from / (used in) operating activities 424,764,563 (how many crores)

• Karthik Rangappa says:

Divide this number by 1 Crore i.e 100,00,000 and you will get the answer.