How to prepare provisional balance sheet for bank loan

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

10 September 2013 sir ,
what are the basic data require for preparing provisional balance sheet and which points should be followed while preparation of provisional balance sheet .How to calculate the bank over draft limits and formalities for getting bank loan based on provisional balance sheet and other details provided for me.
Thanks in advance sir.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

28 July 2024 Preparing a provisional balance sheet for a bank loan involves creating a snapshot of your company's financial position as of a certain date, based on estimates and projections. This provisional balance sheet helps banks assess your financial health and determine your eligibility for a loan. Here’s a detailed guide on how to prepare a provisional balance sheet and the related aspects of obtaining a bank loan:

### **1. Basic Data Required for Preparing a Provisional Balance Sheet**

**Assets:**
- **Current Assets:**
- Cash and Bank Balances
- Accounts Receivable (Debtors)
- Inventory (Stock)
- Prepaid Expenses
- **Fixed Assets:**
- Property, Plant, and Equipment (e.g., land, buildings, machinery)
- Accumulated Depreciation
- **Other Assets:**
- Investments
- Intangible Assets (e.g., patents, trademarks)

**Liabilities:**
- **Current Liabilities:**
- Accounts Payable (Creditors)
- Short-Term Loans and Borrowings
- Accrued Expenses
- Other Current Liabilities
- **Long-Term Liabilities:**
- Long-Term Loans and Borrowings
- Deferred Tax Liabilities

**Equity:**
- **Owner’s Equity:**
- Share Capital
- Retained Earnings
- Reserves and Surplus

### **2. Steps to Prepare a Provisional Balance Sheet**

**1. Collect and Organize Financial Data:**
- Gather data on assets, liabilities, and equity as of the date you are preparing the provisional balance sheet.
- Ensure that data from your accounting records, recent bank statements, and other financial documents are accurate and up-to-date.

**2. Estimate Future Financial Position:**
- Based on your financial projections and estimates, calculate the expected values for assets, liabilities, and equity.
- If applicable, include projected changes such as future sales, expenses, and investments.

**3. Create the Balance Sheet:**
- **Assets Section:**
- List all current assets, fixed assets, and other assets.
- Calculate the total value of each category and then the total assets.
- **Liabilities Section:**
- List all current liabilities, long-term liabilities, and other obligations.
- Calculate the total value of each category and then the total liabilities.
- **Equity Section:**
- List the owner's equity components, including share capital and retained earnings.
- Calculate the total equity.
- **Balance the Sheet:**
- Ensure that Total Assets = Total Liabilities + Equity.

### **3. Points to Follow While Preparing a Provisional Balance Sheet**

- **Accuracy:** Ensure that the figures used are as accurate as possible. Projections should be based on realistic assumptions.
- **Documentation:** Keep detailed records of all estimates and assumptions used in preparing the provisional balance sheet.
- **Consistency:** Use consistent accounting methods and practices as applied in your regular financial statements.
- **Compliance:** Ensure compliance with accounting standards and principles.

### **4. Calculating Bank Overdraft Limits**

**1. Assess Financial Needs:**
- Determine the amount of working capital you need based on your business operations and cash flow requirements.

**2. Evaluate Cash Flow:**
- Review your projected cash flow to estimate your short-term borrowing needs.

**3. Calculate Overdraft Limit:**
- The bank usually assesses your overdraft limit based on your current assets, receivables, and other financial indicators. This is often calculated as a percentage of your current assets or net working capital.

**4. Review Financial Ratios:**
- Ensure that your financial ratios (e.g., current ratio, quick ratio) meet the bank’s requirements for granting an overdraft facility.

### **5. Formalities for Getting a Bank Loan**

**1. Prepare Financial Documents:**
- Provide audited financial statements for the past 2-3 years.
- Submit the provisional balance sheet and cash flow projections.

**2. Write a Business Plan:**
- Include details about your business, its operations, and how the loan will be utilized.
- Outline your growth strategy and financial projections.

**3. Complete Loan Application:**
- Fill out the bank’s loan application form with accurate information.

**4. Provide Collateral:**
- Offer collateral if required by the bank, such as property or inventory.

**5. Submit Required Documents:**
- Identity and address proof of the business owners.
- Legal documents related to the business (e.g., registration certificates, tax returns).

**6. Bank Evaluation:**
- The bank will evaluate your application, provisional balance sheet, and supporting documents.
- They may request additional information or clarification.

**7. Approval and Disbursement:**
- Once approved, the bank will disburse the loan amount as per the agreed terms and conditions.

### **Example of Provisional Balance Sheet**

**Provisional Balance Sheet as of [Date]**

**Assets:**

| **Particulars** | **Amount (₹)** |
|---------------------------|----------------|
| **Current Assets** | |
| Cash and Bank Balances | [Amount] |
| Accounts Receivable | [Amount] |
| Inventory | [Amount] |
| Prepaid Expenses | [Amount] |
| **Total Current Assets** | [Total Amount] |
| **Fixed Assets** | |
| Property, Plant, Equipment| [Amount] |
| Less: Accumulated Depreciation | [Amount] |
| **Net Fixed Assets** | [Total Amount] |
| **Other Assets** | |
| Investments | [Amount] |
| Intangible Assets | [Amount] |
| **Total Assets** | [Total Amount] |

**Liabilities:**

| **Particulars** | **Amount (₹)** |
|---------------------------|----------------|
| **Current Liabilities** | |
| Accounts Payable | [Amount] |
| Short-Term Borrowings | [Amount] |
| Accrued Expenses | [Amount] |
| **Total Current Liabilities** | [Total Amount] |
| **Long-Term Liabilities** | |
| Long-Term Borrowings | [Amount] |
| Deferred Tax Liabilities | [Amount] |
| **Total Long-Term Liabilities** | [Total Amount] |
| **Total Liabilities** | [Total Amount] |

**Equity:**

| **Particulars** | **Amount (₹)** |
|---------------------------|----------------|
| Share Capital | [Amount] |
| Retained Earnings | [Amount] |
| Reserves and Surplus | [Amount] |
| **Total Equity** | [Total Amount] |

**Total Liabilities and Equity** | [Total Amount] |

### **Conclusion**

- **Provisional Balance Sheet Preparation:** Ensure accuracy and proper documentation.
- **Overdraft Limit Calculation:** Based on financial needs and cash flow.
- **Bank Loan Formalities:** Prepare comprehensive documents and follow the bank’s procedures.

If you need further assistance or specific details, consulting with a financial advisor or accountant may provide additional tailored support.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now