Uses of Balance Sheet

It has been stated that the balance sheet shows the financial conditions of a business enterprises. The financial condition is represented by a listing of a kinds and amounts of assets, together with the corresponding total of liabilities and capital. The items are so grouped or set out that they will easily disclose the following information to enable a trade to form an estimate of the business as a going concern:

(i)    The nature and value of the assets held.

(ii)    The nature and extent of the liabilities and their values.

(iii)    Whether the business is solvent and can pay all liabilities from the assets. If so, the amount of capital at that date and also what the capital consists of or how it is distributed throughout the business.

(iv)    Whether debts are contracted without sufficient means to pay them. If so, how far the business is financially unsound. The distribution of total capital among different assets will furnish a fairly clear picture of the business enterprise. Percentages of capital invested in land, building, equipment etc. can be computed. A comparison of these percentages with those of similar firms will show how a firm compares with the typical firm in the same business. The changes in these analytical figures fro year to year will show the businessman the shifts that occur from time to time in his organization.

(v)    A comparative balance sheet which shows the financial positions of a firm at two successive points in time contains more than twice the information of a single balance sheet. Changes from one balance sheet to another provide important clues of favorable or unfavorable trends.

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