Balance sheet is the statement for recognizing the current positions of available assets and liabilities of any company. When preparing for the future plans, one company can seriously consider the result out of the balance sheet.
There are some specific characteristics of this statement:
- This is not an account: Balance sheet isn’t any account to begin with like trading or profit and loss account. There are two sides to make entries and tally between them but it’s a statement rather than any account. Some ledger accounts are enlisted under it but not all.
- Notifying about the assets and liabilities: A balance sheet will help in notifying the current and available assets and liabilities of the company. In order to prepare a balance sheet, one has to enter liabilities as credit and assets as debit account in its sides.In its end both sides will tally.
- Necessary requirements to create it: There are certain other accounts that are necessary to create the balance sheet. They are trading account and profit and loss accounts. The trading account will provide the amount of gross profit or loss and profit and loss account will deliver the amount of net profit or loss.
- Prepared after the end of certain time period: A balance sheet cannot be prepared whenever. There are certain time periods decided by the company’s management when the other entries will be ready to be placed in its sides. Usually, it is made after six months minimum. The company can choose to complete a balance sheet by maintaining the record after the end of a calendar year or an assessment year.
- Understanding the available assets and liabilities: When a balance sheet is made, present assets and liabilities will be categorized clearly to notify the company of their availability, such as:
- Liquid assets
- Fictitious assets
- Fixed assets
- Current assets
- Fixed liabilities
- Current liabilities
- Measuring the financial standpoint: A company can create different important financial ratios depending on the balance sheet. These are important information as it will help in their decisions in future plans and methods.
Importance of preparing balance sheet: There are legal reasons behind preparing a balance sheet. This will not just mention the assets and liabilities of the company but also the current financial position of the business. It is a compulsory part of any firm calculating after an end of calendar or assessment year.