a balance sheet The purposes of preparing a balance sheet are as follows: (a) The main purpose of preparing a balance sheet is to ascertain the true financial position of the business at a particular point of time. (b) It helps in comparing the cost of various assets of the business such as the amount of closing stock, amount due from debtors, amount of fictitious assets, etc. Moreover as assets and liabilities of similar nature are grouped and presented in balance sheet, a comparative study of these assets and liabilities is facilitated. It helps in comparing the various liabilities of the business.
(c) It helps in finding out the solvency position of the firm. The firm’s solvency position is favourable if the assets exceed the external liabilities. The firm’s solvency position is not favourable it the external liabilities exceed the assets. .
. Characteristics of balance sheet The following are the characteristics of a balance sheet: (a) A balance sheet is a part of the final accounts. However, the balance sheet is a statement and not an account. It has no debit or credit sides and as such the words ‘To’ and ‘By’ are not used before the names of the accounts shown therein.
(b) A balance sheet is a summary of the personal and real accounts, which have balances. Personal and real accounts having debit balances are shown on the right hand side known as assets side, whereas personal and real accounts having credit balances are shown on the left hand side known as liabilities side. Accountancy - (c) The totals of the two sides of the balance sheet must be equal. If the totals are not equal, it indicates existence of error.
It must satisfy the accounting equation, ie., Assets = Capital + Liabilities, following the dual aspect concept. (d) Balance sheet is prepared on a particular date and not for a fixed period. It discloses the financial position of a business on a particular date. It gives the balances only for the date on which it is prepared.