Any business is run through transactions such that something comes in and something goes out, which is also called double-entry system. In any business, it is important to keep track (account) of what is coming in and what is going out because with its help many reports are prepared, which also include the balance sheet.
Balance sheet is the supreme report of any business because it contains all the important data of the business with the help of which the business is known. It helps in making business decisions. When anyone wants to invest in a business or join a business, they first look at the balance sheet, income statements, etc. so that they can understand the business.
Table of Contents
What is a Balance Sheet?
Meaning of Balance Sheet
Balance sheet is a financial statement, and it shows the financial position of a business as it contains data (summary) of assets and liabilities. It shows what the business owns and what it owes. The balance sheet is divided into two parts one is liabilities and the other is assets, all payables, creditors, loans, capital, shares, debentures, outstanding payments, etc. are recorded on the liabilities side, and all the receivables, debtors, assets, Advance payments, cash, bank, etc. are recorded on the assets side.
Accounting Equation (Balance sheet Equation)
A = L + C
- A = Assets
- L = Liabilities
- C = Capital (Owners Contribution)
To prepare the balance sheet, first of all, transactions are identified, then measured, then recorded in journal and subsidiary books, then classified into ledger accounts, then manufacturing account, trading account, Profit and Loss Account is prepared, then finally Balance Sheet is prepared. The steps mentioned above are a general approach, but businesses can adopt specific methods to prepare the balance sheet if they wish/want.
Definition of Balance Sheet
According to Eric. L. Kohler – “A statement of the financial position of any economic unit disclosing as at a given moment of time its assets, its liabilities, and its ownership equities.”
According to Freeman – “A Balance Sheet is an itemized list of assets, liabilities, and proprietorship of a business at a certain date.”
According to Palmer – “The Balance Sheet is a statement at a given date showing on one side the trader’s property and possessions and on the other side his liabilities.”
According to Smith and Keith – “The balance sheet, sometimes called the statement of financial position, shows the economic resources of the business at a point in time and the sources of these resources at a point of time.”
Features of Balance Sheet
Following are the features of balance sheet:
1. Financial Statement:
Balance sheet is a financial statement as it shows the economic data of the business and it is a part of the financial statements which include balance sheet, income statement, cash flow statement etc. The balance sheet is divided into two parts, one part shows the liabilities or owes of the business and the other part shows the assets or own by the business.
2. Equal:
The concept of double entry system is applied in the balance sheet due to which the balance on both sides of the balance sheet is equal. If a transaction affects assets it will also affect liabilities because in accounting every transaction is recorded and managed according to the double entry system.
3. Assets and Liabilities:
If we divide all the economic transactions of business, then they will be divided into only two parts: firstly; assets and secondly; liabilities. The balance sheet shows all the assets and liabilities of the business, the assets side shows cash, banks, assets, debtors, advance payments, etc. and the liabilities side shows creditors, loans, debentures, capital, dues/outstanding payable, etc.
4. Helps in Planning:
Balance sheet helps in planning as it provides data of the financial position of the business. Before preparing the balance sheet, many other reports are prepared with the help of which it is prepared, hence when the balance sheet is used then all the other reports are also used along with it.
5. Certain Period:
Preparing the balance sheet is a time-consuming process as it requires closing all the accounts and preparing other reports before preparing it due to which it has to be prepared in a certain period decided by the management of the business. It is mandatory to prepare a balance sheet at the end of the financial year.
6. Helps to Management:
The main objective of preparing a balance sheet is to know about the financial position of the business and what is owned and owed by the business. By using the data of the balance sheet, management makes decisions for the business because the balance sheet shows whether the balance of both sides is as per their ratio or not.
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QNA/FAQ
Q1. What is a Balance Sheet?
Ans: Balance sheet is a financial statement, and it shows the financial position of a business as it contains data (summary) of assets and liabilities. It shows what the business owns and what it owes.
Q2. Write the equation of balance sheet.
Ans: A = L + C (Assets = Liabilities + Capital)
Q3. Are both sides of the balance sheet equal?
Ans: Yes, both sides of the balance sheet are equal as it follows the concept of double entry system.
Q4. Is balance sheet a financial statement?
Ans: Yes, balance sheet is a financial statement because it shows the data of economic transactions, and it is a part of the financial statements.
Q5. Write the features of a balance sheet.
Ans: Following are the features of balance sheet:
1. Balance sheet is a financial statement.
2. Both sides of the balance sheet are equal.
3. Balance sheet shows assets and liabilities.
4. Balance sheet helps in planning.
5. Balance sheet is prepared over a certain period.
6. Balance sheet helps in management.
