Every business entity prepares a balance sheet at the end of each year, and most of the companies prepare at the end of the month. The purpose of balance sheet is to give a clear picture of financial position of a business or entity. Balance sheet consists of the assets, liabilities and owner’s equity of a business or entity. Data of the balance sheet is most important because the financial position of the business changes quickly. Usefulness of the balance sheet increases if it is relatively recent. Example of the balance sheet is as follows:
Let’s illustrate the features of this balance sheet. First, heading sets three things (i) the name of business entity (ii) name of the financial statement (iii) date of the balance sheet. The body is also the combination of three things such as: assets, liabilities and owner’s equity.
Note that items will be listed according to nature; the more liquid asset will list first followed by other more liquid asset such as: cash, notes receivable, accounts receivable, etc that will be soon consumed in business operations or converted into cash. Permanent assets or fixed assets are land, equipment, and building. Liabilities must be shown before owner’s equity and with same pattern followed in assets (notes payable, accounts payable and salaries payable etc.) followed by a heading and figure total liabilities.
This financial statement is also known as a balance sheet so the both sides must be equal. That is, the total assets = 600000 and liability + owner’s equity = 600000, Remember this relationship always exists.