Objectives of Balance Sheet

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All work done in business has some objective because no work in business is done without an objective, the same rule also applies to the accounting reports prepared in business. All the reports prepared in accounting reflect the status, performance, growth, potential, etc. of the business in some form or the other. Management cannot make related decisions without accounting reports because unless they know for what objective the decision is to be taken. One of these accounting reports is the balance sheet.

There are many objectives of preparing a balance sheet as it shows the assets and liabilities of the business. The balance sheet is a statement of accounts and shows how many liabilities the business has and how many assets it has. The balance sheet is divided into two parts, one is liabilities and the other is assets. All things that the business owes appear on the liabilities side of the balance sheet and all things that the business owns appear on the assets side of the business.

Objectives of Balance Sheet

Following are the objectives of the balance sheet:

1. Assets and Liabilities:

The main objective of the balance sheet is to provide or show data of the assets and liabilities of the business. Assets and liabilities help in assessing the position of the business and making appropriate decisions. All the liabilities like capital, creditors, dues payable, loans, etc. are shown on the liability side of the balance sheet, and all the assets like cash, banks, property, advances payable, etc. are shown on the asset side of the balance sheet. The usual format shows liabilities on the left and assets on the right.

2. Helping in Decision Making:

Another objective of the balance sheet is to help the management in making decisions. The balance sheet provides data of the status of the business to the management. Any decision is considered a good decision only when it is based on data. With the help of balance sheet, managements are able to make various types of decisions like future activities, control over liabilities and assets, etc. Note that other related reports are also required for decision-making.

3. Attract External Resources:

Attracting external resources is also an objective of the balance sheet because external resources play a very important role in business. Balance sheet provides data of the status of the business which helps in attracting resources. Any person looks at business reports before joining any business because everyone’s objective is to make a profit. An investor invests in a business only when he is confident that the business will give good returns on his investment. The balance sheet helps provide confidence to investors, but other reports are also needed.

4. Owner’s Share:

Showing the owner’s share is also an objective of the balance sheet because knowing the owner’s share or investment is very important for the business. The owner’s share may vary in different types of businesses. The concept of the balance sheet is based on the equation formula (Assets = Liabilities + Owner’s Share) which is why it becomes easier to calculate the actual liability if the owner’s share is known. When the actual liability is known, it becomes easier to make related decisions.

5. Nature of Liabilities:

Another objective of the balance sheet is to show the nature of liabilities as it helps in understanding the liabilities making it easier to manage the liabilities. Business has mainly two types of liabilities one is short-term term liability which is also known as current liability and the other is long-term liability which is also known as non-current liability. Short-term liabilities are those liabilities that are required to be paid within the accounting period (one year) or relate to a period of less than one year and long-term liabilities are those liabilities that are not required to be paid within one year.

6. Nature of Assets:

Showing the nature of assets is also an objective of the balance sheet because knowing the nature of assets is very important for the business. It helps the management to make appropriate decisions. Business generally has two types of assets, fixed assets which are also called long-term assets and the other is current assets which are also called short-term assets. Current assets are those assets that are used within a year and fixed assets are those assets that are used for more than a year.

7. Help in Error Detection:

Preparing the balance sheet helps in error detection as it’s both sides are equal only when all the transactions are recorded correctly. The rule of double entry system applies in the balance sheet which affects both sides. If the rule of double entry system is not used correctly while recording the transactions then it becomes known while preparing the balance sheet. Although trial balances are also used, but trial balances only contain data up to the classification of transactions.

Read Also:

• What is a Balance Sheet? Meaning, Features, and More.
• Format of Balance Sheet
• Contents of Balance Sheet

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