A Balance Sheet is one of the financial Statements the reveal the financial status of the business at a given point in time.
It basically lists down all Assets, Liabilities, and the overall Equity (or Capital) that has been invested into the organization.
In other words, the balance sheet is a snapshot of the overall amounts that the company owns and owes at a given point in time. Subsequently, it tells what the company is actually worth.
Organizations create Balance Sheets for a number of different reasons, which are listed below.
Here, we will discuss the overall purpose of financial statements.
1) To assess the overall Financial Assets that a company owns.
Even though profitability plays a pivotal role in gauging the overall efficiency of the business, the Balance Sheet depicts the material impact of profitability on the overall organization.
It lists down all assets, both short-term as well as long-term, which the organization owns. It is important to keep track of the overall assets because an increase in profitability would not make sense with no increase in assets.
Therefore, it is important to know the Net Assets that a company owns at a given point in time.
2) As a tool for Investors
Investors study organizations in great detail before deciding whether to invest in the venture or not.
They normally use the balance sheet as a tool to gauge the overall financial standing of the company. This is because the Balance Sheet lists down the Financial Assets that the company has and the amount it owes to its creditors.
Investors use these aspects to evaluate the overall potential for returns on their investment to make a decision accordingly.
3) As a tool for Credit and Risk Management Companies
Determination of Creditworthiness continues to be a pressing cause of concern for organizations and leaders across the world.
Uncertainty of being paid back really deters the overall confidence that these people have when conducting business transactions.
For instance, banks and/or other lending institutions have no way of assessing the company’s financial health except for looking into their Financial Statements, particularly the Balance Sheet.
4) In order to conduct Ratio Analysis
Ratio Analysis is simply a comparison of the line items that are presented in the Balance Sheet.
Having a consolidated list of assets, liabilities, and capital can help them conduct Ratio Analysis, which can provide them with valuable insights regarding the aspects that need to be focused on to improve their financial standing.
For instance, using Liquidity Ratios, like Quick Ratio and Current Ratio, can determine the best course of action to be taken, depending on the results.
5) Legal Obligation
Regardless of their size or stature, almost all companies are supposed to file their set of Financial Statements at the end of every Fiscal Year. This is to ensure that there is maximum transparency and the risks of any fraudulent activity are minimized.
The balance sheet is one of the financial statements that the company needs to prepare and attach with other statements. The same as other statements, it needs to prepare by showing the comparative figure.