What is a Balance Sheet

A balance sheet is an accounting statement, which shows the value of the assets and liabilities after computing the values of the entire year. Like all other financial statements, this too is a bridge, which allows the stakeholders and the other creditors of the business to know the financial position of the business. It is also used for internal auditing as well as analysis. There are a few uses, which the balance sheet is put into. They are as follows.

  • Information- the balance sheet provides accurate information to all the parties related to the business. It shows the investors about the profits earned by the company so that they believe in the dividends given by the company. According to the Companies Act, it is mandatory for the company to publish the balance sheet and let all the parties know about the functioning of the company. This is done to safeguard the interests of the investors.
  • Management- the balance sheet provides information, which is very useful to the management. The management can make use of this information to make crucial decisions like purchases and the sales of the company.
  • Identifying problems- if the company is facing a loss, the balance sheet aids in finding out the places where the problem has occurred. This also enables them to find the right solution to the problem. It is very important to find the problem correctly as finding a solution to a wrong problem will not help.
  • Auditing- all the financial statements along with the balance sheet are prepared for auditing purposes. The government sends an auditor to check all the accounts and certify that all the accounts are precise and nothing is wrong.

The balance sheet consists of all the assets and liabilities of the company. the actual values of these assets and liabilities are mentioned here. For example, if the value of an asset is US $10,000, we would not about the true value that is derived only after depreciating the value as per the policies of the firm. However, the value of the asset after depreciation is given in the balance sheet.

The liability side of the balance sheet also has the value of equity that the company owes to the public or the shareholders. This will also have the part of profit which is used back in the expansion of the business. One important aspect which everyone should know about a balance sheet is that the assets and liabilities sides should match and have the same values. There is no exception to any balance sheet and this is the checking point if the balance sheet is drawn properly or no.