Balance Sheet (Liability Side)

Balance Sheet (Liability Side)

Total liability has 3 components

            1. Equity  ( Share Holders funds)

            2. NonCurrent Liability  ( Long term loan or borrowing )

            3. Current Liability  (Short Term payables)

When we say Debt /Equity ratio we talk about:

            D/E ratio = NonCurrent liability / Equity

Equity has 2 components

            Share Capital ( Nominal Capital)        

            Reserve ( Retained Earning)

Share Capital = Face value × Number of shares.

            Share Capital consists of 2 Parts.

                        1. Authorised Share Capital

                        2. Paid up capital ;- Issued shares. These are the Total Outstanding shares. 

                                    We use this number for calculation of EPS.

                                    Paid up capital is a subset of Authorised capital.

            Hence , Authorised capital is always more than Paid Up capital

            Authorised capital is Number of shares Authorised by Share holders and Approved by Registrar of Companies. Its mentioned in MOA of companies.

LESSONS LEARNT:

1. Reserves and surplus are a liability because shareholders funds are a Liability to the company. When company is shut down,it has to refund money to shareholders, hence, it’s a liability

2. Current ratio = Current asset/Current liability

            It has to be more than 1.

            Current ratio tells us the ability of the company to meet it’s short term financial obligation

3. Quick ratio= (Current Asset- Inventory )/ Current liability

            Inventory needs time to sell and get money from it.

            Hence, it’s reduced in Quick ratio.

            Quick ratio is similar to Current Ratio but  more specific

4. Liquidity ratios are important, because,these are the areas where we can detect future  problem in company. Early signs of dangers are seen in liquidity ratios. It’s like householder is not able to pay Bills and buy groceries. .

5. Current Liability: Short term liability, which has to be paid within a year

6. Non current Liability: long term loans, which needs to be paid more than 1 year

7. Solvency ratio:  Solvency ratio means company is not able to pay any loan. Company will die soon.  E.g. Jet Airways,  Reliance Power, Reliance Communication

8. Let’s discuss what happens to Share Capital when bonus share is issued.

            Let’s say a Company has share capital of 10 Crore.

            1 crore shares of Rs 10 face value.

            Company has reserve of 200 cr.

            When company declare bonus 1:1 ,then number of shares become 2 Cr and Reserve become half.

            After bonus

                        Share Capital is 20 Cr (2 Cr shares of face value Rs 10)

                        Reserve is 100 Cr.

                        Share Price become half.

9. Let’s discuss what happens to Share Capital when  Face value is split.

            Let’s say a Company has share capital of 10 Crore.

            1 crore shares of Rs10 face value.

            Company has reserve of 200 cr.

            When company split face value from Rs 10  to Rs 5 ,then number of shares become 2 Cr  and Reserve remains same

            After split

                        Share Capital is 10 Cr (2 Cr shares of face value Rs 5)

                        Reserve is 200 cr.                         Share Price become half.