After ascertaining the profit or loss of the business,
the businessman wants to know the financial position of his
business. For this purpose he prepares a statement of Assets
and Liabilities, which is called Balance Sheet. It is prepared
on a specified date because the figure shown in the Balance
Sheet is true on that date only. The totals of the Assets
and Liabilities should be equal. If it is not so, it means
that there is some error.
The Committee on Terminology of American Institute of Certified
Public Accountants has defined the balance sheet as, "a
list of balances in the assets and liability accounts. This
list depicts the position of assets and liabilities of a specific
business at a specific point of time."
Balance Sheet Objectives
The following are the objectives of preparing a balance sheet:
- Principal Objective: The main purpose of preparing
balance sheet is to know the financial position of the business
at a particular date.
- Subsidiary Objectives: Though the main aim is to
know the exact financial position of the firm at a particular
date, yet it serves other purpose as well.
- It gives information about the actual and real owner’s
equity. Though the capital of the owner indicates owner’s
equity, yet some other liabilities are to be accounted
for against it also.
- It helps the firm to make provisions against possible
future losses. A provision is made in the form of the
Reserves.
Balance Sheet Characteristics
The Balance Sheet as distinct from other financial statements
has the following characteristics:
- It is a statement and not an account. Although balance
sheet is a part of the final accounts and prepared with
the help of accounts, yet it is not an account but a statement.
- It is always prepared on a particular date, and thus shows
the position at that date and not for a period.
- It has no debit side and credit side. Nor the words ‘To’
and ‘By’ are used before the names of the accounts shown
therein. The headings are Liabilities and Assets.
- It shows the financial position of the business concern.
- It shows what the firm owes to others and also what others
owe to the firm.
- The totals of Liabilities and Assets always are equal.
Uses
of Balance Sheet
The balance sheet reflects the financial position of the
enterprise. It provides useful information to various users.
The balance sheet is described as a snapshot of the financial
position of a business entity. The various groups interested
in the company can draw useful inferences from an analysis
of the information contained in the balance sheet. The balance
sheet is also called the position statement.
- It shows the financial position of the business concern.
- It shows what the firm owes to others and also what others
owe to the firm.
- It shows the nature and value of the assets.
- It also reflects the liquidity of a firm.
Q. What is a Balance Sheet? What are the objectives of
preparing Balance Sheet? Explain its characteristics. |
Accounts
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