How to Read a Balance Sheet in Vertical Format

Open any Indian company’s annual report and the balance sheet won’t look like the simple T-shaped ledger you may have learned in school. Instead, you’ll see one long list of figures running from top to bottom. This is the vertical format, and once you know how to read it, it tells you exactly where a company got its money and what it did with it. Let’s break down the structure so the numbers stop feeling like a wall of text.

What is the vertical format of a balance sheet? 🔗

Instead of placing liabilities on the left and assets on the right, as the older horizontal or “T-form” balance sheet does, the vertical format stacks everything in a single column, one section after another. The logic is simple: first you show where the company’s funds came from, then you show where those funds were put to use.

This structure splits the entire balance sheet into two broad heads: Sources of Funds and Application of Funds. Together, they must always be equal, because every rupee a company raises has to end up somewhere, whether it’s sitting in a factory, in inventory, or in the bank.

Sources of funds: where the money comes from 🔗

The first half of the vertical balance sheet answers a single question: who financed this business? There are only two possible answers, owners or lenders, and the format splits the section accordingly.

Shareholders’ funds 🔗

This is the money that belongs to the owners of the company. It has two components. Share capital is the amount shareholders directly invested when they bought shares in the company. Reserves and surplus is the accumulated profit the company has chosen to retain rather than distribute as dividends, along with items like the securities premium or general reserve. Together, these represent the company’s own stake in its business, as distinct from money it owes to outsiders.

A growing reserves and surplus figure year after year is usually a healthy sign. It generally means the company is generating profits and reinvesting them rather than relying solely on fresh borrowing to fund growth.

Loan funds 🔗

The second component of Sources of Funds is money borrowed from lenders. This is split into two categories based on risk. Secured loans are backed by specific company assets as collateral, such as a term loan against a factory building or machinery. If the company defaults, the lender has a legal claim on that specific asset. Unsecured loans, on the other hand, aren’t backed by any particular asset. They rely purely on the borrower’s creditworthiness, which typically makes them carry a higher rate of interest to compensate the lender for the added risk.

Adding shareholders’ funds and loan funds together gives you the company’s total capital employed, the full pool of money available for the business to work with.

Application of funds: where the money goes 🔗

Once you know where the money came from, the second half of the balance sheet shows what the company did with it. This section is organised by how quickly each item can be converted into cash, moving from the most permanent investments to the most liquid ones.

Fixed assets 🔗

These are long-term assets the company owns and uses to run its operations, such as land, buildings, plant, machinery, and equipment. Fixed assets are usually shown net of accumulated depreciation, so the figure reflects their current book value rather than their original purchase cost.

Investments 🔗

This covers funds parked in shares, government securities, bonds, or other financial instruments, typically held for the long term rather than for day-to-day trading. Investments represent surplus capital that management has chosen to deploy for additional returns instead of leaving it idle.

Net current assets 🔗

Net current assets, often called working capital, is the difference between current assets (cash, inventory, receivables, and similar short-term items) and current liabilities (amounts payable within the next year, like trade payables or short-term borrowings). A positive net current assets figure means the company has enough short-term resources to comfortably cover its near-term obligations.

Miscellaneous expenditure 🔗

This is a smaller, somewhat unusual line item that represents expenses incurred but not yet fully written off in the profit and loss account, such as preliminary expenses for setting up the company or heavy discounts on the issue of shares or debentures. These are carried forward and gradually written off over a few years rather than charged entirely in the year they were incurred.

Putting it together: a sample vertical balance sheet 🔗

Seeing the format laid out with actual figures makes the logic click faster than any description can. Here is a simplified illustration:

Notice that both totals match exactly. That’s not a coincidence, it’s the fundamental accounting equation at work: every source of funds must be matched by an equal application of funds, since assets are always financed either by owners’ equity or by borrowed money, as this summary of balance sheet preparation under the Companies Act explains.

Why the vertical format is preferred 🔗

The vertical format has largely replaced the horizontal one for company financial statements, and for good reason. Listing items one below the other rather than side by side makes it far easier to compare figures for the current year against the previous year, since both columns run down the same page instead of being split across two facing sides. It also naturally supports what accountants call vertical or common-size analysis, where each line item is expressed as a percentage of total funds, making it simple to track how a company’s financing mix or asset allocation shifts over time.

The format also mirrors how most people already read financial information, from the big picture down to the details, which is one reason regulators and analysts consider it more analytical and disclosure-friendly than the older T-form layout, according to this guide to balance sheet formats in India.

How this connects to today’s reporting requirements 🔗

It’s worth knowing where this “Sources and Application of Funds” language comes from. It originates from Schedule VI of the earlier Companies Act, 1956, which prescribed this exact vertical layout for company balance sheets, as outlined in this overview of the vertical balance sheet format. Many textbooks and foundational commerce courses still teach the concept using this original terminology because it captures the underlying logic so clearly.

Under the current Companies Act, 2013, this structure has been carried forward but renamed. Schedule III now governs the format, and it labels the two sections “Equity and Liabilities” and “Assets” instead of “Sources of Funds” and “Application of Funds.” Items within each section are further split into current and non-current categories based on whether they’ll be settled or realised within twelve months, as detailed in this explanation of the Schedule III format. The order also flips slightly, starting with equity and liabilities at the top and moving to assets below, but the core idea remains unchanged. You’re still separating “where the money came from” from “where the money went,” as this breakdown of the Schedule III vertical structure makes clear.

So if you come across both sets of terms in your coursework, don’t treat them as contradictory. The “Sources and Application of Funds” language reflects the classical, conceptual version of the vertical format that’s ideal for learning the logic, while “Equity and Liabilities” and “Assets” is the terminology you’ll actually find in a company’s published financial statements today, a distinction well covered in this guide to company balance sheets.

Reading beyond the numbers 🔗

Once you’re comfortable with the structure, the real skill is in interpretation. A company with a large proportion of loan funds relative to shareholders’ funds is more leveraged, meaning it depends heavily on borrowed money and carries higher financial risk. A company with strong reserves and surplus and modest loan funds tends to be more financially conservative. Net current assets tell you about short-term liquidity, whether the business can meet its near-term obligations without scrambling for cash. None of this is visible from the raw numbers alone; it only becomes clear once you know which section each figure belongs to and why, a point emphasised in this introduction to vertical financial statements prepared for commerce students.

What do you think? If you compared two companies from the same industry, one with mostly shareholders’ funds and the other relying heavily on loan funds, what would that difference suggest about how each business might handle a slowdown in sales? And looking at a real balance sheet, would you be able to tell at a glance which section, sources or application, has grown faster over the past few years?

References

1. https://indiafreenotes.com/preparation-of-balance-sheet-as-per-companies-act-2013-under-vertical-format/
2. https://www.udyamregistration.services/re-registration/balance-sheet-format-in-india-complete-guide-with-templates-2026/
3. https://psbtrainingacademy.com/vertical-balance-sheet-format/
4. https://tallysolutions.com/accounting/what-is-schedule-iii-of-the-companies-act-applicability-format-and-purpose-explained/
5. https://www.thinkingbridge.in/blog/format-of-balance-sheet-schedule-iii-key-notes-explained
6. https://testbook.com/question-answer/in-the-vertical-balance-sheet-format-under-schedul–690465d6dfc4a3d1aaaabedf
7. https://slm.mba/mmpc-004/complete-guide-company-balance-sheets-schedule-iii/
8. https://siesce.edu.in/docs/resources/2.%20%20Vertical%20Statements.pdf