Balance Sheet

Balance Sheet shows the financial position of a business on a certain date. It is also called statement of financial position. Balance sheet indicates the investing and financial activities of a business at a point of time and shows a firm’s assets, liabilities and equity capital usually at the close of the last day of a month or year.

Assets are economic resources and provide future benefits to a firm such as cash, inventories, debtors, building, plant, patents, goodwill etc. Liabilities are creditors’ or outsiders’ claims on the assets of a business enterprise such as creditors, accounts payables, salaries payable, income tax payable, debentures etc.  Liabilities include shareholders’ equity as well which are in the form of ordinary shares, preference shares, and retained earnings.

The balance sheet is prepared from the trial balance after all the nominal accounts and accounts relating to goods have been closed by transfer to trading and profit and loss account. The balance sheet is described as a classified summary of debit and credit balances existing in the trial balance after the trading and profit and loss account has been prepared.

The balance sheet should provide information in respect of:

·         The nature and cost (or book value) of the assets;

·         The nature and amount of the liabilities;

·         The amount of capital;

·         Whether the firm is solvent and

·         Whether the firm is overtrading.