What is a Balance Sheet and what information does it
convey to an outsider?
The balance sheet is a statement, which shows the financial
position of a business on a particular date. It is a statement
of balances of all the accounts real and personal, debit balances
of all such accounts represent assets and credit balances
represent the liabilities. Thus, balance sheet shows the assets
and liabilities grouped properly classified and arranged in
a specific manner.
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.
What information does it convey to
an outsider?
Balance sheet is prepared with a view to measure the true
financial position of a business concern at a particular point
in time. It shows the financial position of a business in
a systematic form. It is a screenshot of the financial position
of the business. At one glance, the position of the business,
at a particular point of time, can be understood.
The various groups interested in the company can draw useful
inferences from an analysis of the information contained in
the balance sheet.
Shareholders usually have twin interests, an interest in
receiving a regular income and an interest in the appreciation
of their investment in shares. Investment decisions of the
prospective investors and dis-investment decisions of the
existing investors are influenced by the composition of assets
and liabilities shown in the balance sheet.
Similarly, other interested parties like regulatory and
developmental agencies of the government, consumer, and welfare
organizations can derive useful conclusions from a study of
the balance sheet about the working of the corporate sector
and its contribution to the national economy. |
Accounts
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