The main objectives of preparing a Balance Sheet is to ascertain the financial position of the business on a particular date. While ascertaining the financial position, we also obtain the following additional information:
Nature and Value of the assets:
A balance sheet contains various assets in classified, from with their respective values and as such it gives a clear picture about the nature and the value of different assets Comprising fixed assets, current assets etc.
Nature and extent of liabilities and actual capital:
Like assets, a balance sheet also contains different liabilities in a classified form and shows the amount of liabilities the business owes to different types of creditors. It also shows the actual capital of the business at the end of trading period, representing the excess of assets over liabilities.
Solvency of the business:
If the assets exceed the liabilities the business is considered as solvent. Greater is the difference, stronger is the financial position. On the other hand, if liabilities exceed the assets, the business is considered as insolvent.
Over-trading and under-trading:
If the total creditors exceed assets – Cash, Bank, Investments, Debtors etc., the position of the business is financially unsound, indicating over-trading. For sound financial position, a business must have sufficient working capital. On the other hand, under-trading indicates excess liquid assets over current liabilities, showing idleness of the funds.