Balance Sheet: Meaning, Format, Need and Objectives
The Balance Sheet is the statement showing the business’s financial position at a given time. It is the statement showing the value of assets and liabilities of a firm at a certain date. The Balance Sheet shows the report of the property owned by the enterprise and the claims of the creditors and owners against these properties. The total of both sides (i.e., assets and liabilities) of the balance sheet should be equal.
The financial position of a firm is shown by its assets and liabilities on the given date. A company is financially stable when the assets are more than the liabilities, and it represents capital. The Balance Sheet is prepared from the Real Accounts and Personal Accounts. Ledger accounts that have not been closed having debit balances are shown on the assets side and those having credit balances are shown on the liabilities side.
“A Balance Sheet is a screen picture of financial position of a going business at a certain moment.” –Francis R. Stead
Assets = Liabilities + Capital
Need for Balance Sheet:
1. Balance Sheet shows the business’s financial position at a glance at a particular time.
2. Balance Sheet shows the financial position of the business in a systematic and standard form.
3. Balance Sheet states whether the business is solvent or not. If the value of the assets is more than the liabilities, the firm is solvent and if the liabilities exceed over assets, the firm is insolvent.
4. Balance Sheet helps us to determine the purchase consideration of the business.
5. Balance Sheet is prepared to measure the true financial position of the firm at a particular date.
Preparation of Balance Sheet (Format):
1. Vertical Format (Balance Sheet as per Schedule III of Companies Act, 2013):
2. Horizontal Format:
Objectives of Financial Statements (Balance Sheet):
1. To provide useful information to the management of an organisation for the purpose of planning, controlling, analysing, and decision-making.
2. To provide information to prospective investors to attract them, so that they can take rational decisions regarding their investment based on the reports.
3. To demonstrate a company’s creditworthiness to lenders and creditors, as financial reports help them in evaluating the ability of a company in repaying their money.
4. To provide information to the shareholders and public at large about the various aspects of the entity.
5. To disclose how an organisation is procuring and using various resources.
6. To facilitate the statutory audit.
7. To abide by different legal and governmental regulations.
8. To disclose information about the economic resources of an entity claims to these resources(liability and owner’s equity), and to show how these resources and claims have undergone changes over a period of time.
9. To supply details on the cash flows that a business is exposed to, including their timeliness and volatility.
10. To determine the liquidity position of an organisation, which in turn can be used to evaluate whether an organisation can continue as a going concern.
The balance sheet is one of the most important financial statements of the Company as it shows the organisation’s financial position. The information found in a company’s balance sheet is essential for many stakeholders, investors, potential investors, government, etc.; without this knowledge, it can be difficult to know whether a company is struggling or thriving.
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