The Vertical Form of the Balance Sheet
Chapter Seven
Syllabus topic 3, "Study of Balance sheet and Income statement / Revenue statements in vertical form suitable for analysis ii. Relationship between items in Balance Sheet and Revenue statement iii. Tools of analysis of Financial Statements (i) Trend analysis (ii) Comparative Statement (iii) Common Size Statement"
Pages 13 to 15 of 162
In one line
The vertical balance sheet runs down the page in two halves, sources of funds and application of funds, and both halves come to the same figure, the capital employed.
The form
Sunrise Industries Ltd, balance sheet as at 31 March 2027, in vertical form.
| Particulars | Rs | Rs |
|---|---|---|
| I. SOURCES OF FUNDS | ||
| (1) Proprietors' funds | ||
| Equity share capital, 1,00,000 shares of Rs 10 each | 10,00,000 | |
| 9 per cent preference share capital | 2,00,000 | |
| Reserves and surplus | 3,00,000 | |
| Total proprietors' funds | 15,00,000 | |
| (2) Loan funds | ||
| 10 per cent debentures | 4,00,000 | |
| Total loan funds | 4,00,000 | |
| CAPITAL EMPLOYED | 19,00,000 |
| Particulars | Rs | Rs |
|---|---|---|
| II. APPLICATION OF FUNDS | ||
| (1) Fixed assets, at cost less depreciation | 14,00,000 | |
| (2) Non-current investments | 1,00,000 | |
| (3) Working capital | ||
| Current assets: | ||
| Stock | 3,00,000 | |
| Debtors | 2,40,000 | |
| Cash and bank balances | 1,80,000 | |
| Prepaid expenses | 40,000 | |
| Total current assets | 7,60,000 | |
| Less: current liabilities | ||
| Creditors | 2,20,000 | |
| Outstanding expenses | 38,000 | |
| Provision for taxation | 1,02,000 | |
| Total current liabilities | 3,60,000 | |
| Working capital | 4,00,000 | |
| CAPITAL EMPLOYED | 19,00,000 |
The two halves agree at Rs 19,00,000, and that agreement is the check. It is not the balance sheet total; the total of assets is Rs 22,60,000, and the difference of Rs 3,60,000 is the current liabilities, which the vertical form has netted off rather than shown as a source.
The four figures the form produces
| Figure | How it is arrived at | Ratios that need it |
|---|---|---|
| Proprietors' funds | Equity capital + preference capital + reserves and surplus, less fictitious assets | Proprietary, debt equity, return on proprietors' fund |
| Capital employed | Proprietors' funds + long-term loan funds | Return on capital employed, and the Du Pont chart |
| Working capital | Current assets less current liabilities | Stock working capital ratio |
| Total assets | Fixed assets + investments + current assets | Proprietary ratio |
Note what capital employed is NOT. It is not the balance sheet total, and it is not fixed assets. It is the long-term money in the business, and it equals fixed assets plus investments plus working capital, which is the same money seen from the other end.
The rules for building it
1. Proprietors' funds include preference capital. MU's own bracket in the Module III topic says so: "Return on proprietor's Fund (Shareholders Fund and Preference Capital)". The return on EQUITY capital excludes it, and that is a different ratio.
2. Fictitious assets are deducted from proprietors' funds, not shown as assets. Preliminary expenses not written off, discount on issue of shares or debentures, and any debit balance in the profit and loss account are not assets. Deduct them from reserves and surplus.
3. Loan funds are the LONG-TERM borrowings only. Debentures, term loans, public deposits repayable after a year. A bank overdraft repayable on demand is a current liability, not a loan fund, unless the question says it is a permanent arrangement.
The Vertical Form of the Balance Sheet
4. Current liabilities are netted against current assets, not shown as a source. This is the difference from the two-sided form and the reason working capital appears at all.
5. Investments are non-current unless they are readily realisable. Short-term investments held as a home for surplus cash are current assets.
A common arrangement of the same thing
Some textbooks put fixed assets first and reach working capital last; some reach "net capital employed". The order of the lines does not matter provided the two halves agree and the four figures above can be read off. What matters is that working capital and capital employed are visible.
The prior year, which Module II will need
Sunrise Industries Ltd, balance sheet as at 31 March 2026, in vertical form.
| Particulars | Rs | Rs |
|---|---|---|
| Equity share capital | 10,00,000 | |
| 9 per cent preference share capital | 2,00,000 | |
| Reserves and surplus | 1,40,000 | |
| Proprietors' funds | 13,40,000 | |
| 10 per cent debentures | 4,00,000 | |
| Loan funds | 4,00,000 | |
| CAPITAL EMPLOYED | 17,40,000 |
| Particulars | Rs | Rs |
|---|---|---|
| Fixed assets, net | 13,00,000 | |
| Non-current investments | 1,00,000 | |
| Current assets: stock 2,60,000, debtors 1,60,000, cash 1,50,000, prepaid 20,000 | 5,90,000 | |
| Less: current liabilities, creditors 1,40,000, outstanding 32,000, provision for tax 78,000 | 2,50,000 | |
| Working capital | 3,40,000 | |
| CAPITAL EMPLOYED | 17,40,000 |
Both years agree, and the two together are the material for every comparative statement, common size statement and ratio in the rest of the book.
What it does NOT mean
The vertical form does not change any figure. Every number in it is the number in the two-sided balance sheet. Only the arrangement differs.
It is not the form a company files. A company files Schedule III. This form is made by the analyst, from the filed statement.
Working capital is not cash. It is current assets less current liabilities, and a company with large working capital can still be short of cash, which is what Module IV is about.
Quick revision
| Two halves | Sources of funds; application of funds |
| Both come to | Capital employed |
| Proprietors' funds | Equity + preference + reserves, less fictitious assets |
| Capital employed | Proprietors' funds + long-term loan funds |
| Working capital | Current assets less current liabilities, shown inside the application half |
| Not a source | Current liabilities; they are netted off |
Test yourself
- Which two figures does the vertical form produce that the two-sided form does not?
- Is capital employed the same as the balance sheet total?
- Where do preliminary expenses not written off appear?
- Is a bank overdraft a loan fund?
- For Sunrise in 2027, what is capital employed, and prove it two ways.
Answer in one sentence
1. Working capital and capital employed.
2. No; the balance sheet total for Sunrise in 2027 is Rs 22,60,000 and capital employed is Rs 19,00,000, the difference being the current liabilities that the vertical form nets off.
The Vertical Form of the Balance Sheet
3. Deducted from proprietors' funds, because they are fictitious assets and not assets at all.
4. No, it is a current liability, unless the question says the arrangement is a permanent one.
5. Rs 19,00,000, being proprietors' funds 15,00,000 plus loan funds 4,00,000, and equally fixed assets 14,00,000 plus investments 1,00,000 plus working capital 4,00,000.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.