Question

Explain the purpose of the Balance Sheet and describe the information that it contains. Also indicate which financial statement(s), if any, should be prepared before the Balance Sheet.

Answer 1

• Purpose of Balance Sheet

--balance sheet is prepared for the purpose of ascertaining the financial position of a business on a particular date.

--The businessman and stakeholders wants to know where their business stands and how it is performing.

--Hence, a Balance sheet is prepared which contain account balances on a particular date, usually 31 December.

• Information that balance sheet contains

--Information regarding working capital availability as it shows how much Current Assets are there as compared to Current Liabilities.

--balance Sheet also discloses the amount of Stockholder’s Equity which includes prior period Net Income (loss) accumulated in Retained earnings.

--Basically a Balance sheet contains information regarding 3 things: ASSETS, LIABILITIES, and STOCKHOLDER’s EQUITY.

• The Statements that should be prepared before the Balance Sheet are:

--#1 Income Statement [which is prepared after adjusted trial balance]

This is because Net Income or Loss is to be computed and be taken over to Statement of retained Earnings

--#2 Statement of Retained earnings.

This is because Stockholder’s Equity section in Balance sheet requires the updated Retained Earnings balance. This is possible if Statement of Retained earnings is prepared before balance sheet.