What is the Purpose of the Balance Sheet?

Purpose of the Balance Sheet

Share This...

Purpose of the Balance Sheet

The balance sheet, also known as the statement of financial position, provides a snapshot of a company’s financial condition at a specific point in time. It lists a company’s assets, liabilities, and shareholders’ equity. Here are the primary purposes of a balance sheet:

In summary, the balance sheet is a key financial statement that provides valuable insights into a company’s financial position, financial health, risk levels, performance, and it aids in decision-making processes.

Example of the Purpose of the Balance Sheet

Let’s consider a simplified example of a balance sheet for a hypothetical company, “Healthy Foods Inc.”, at the end of the year 2023:

Current Assets:
Cash and Cash Equivalents: $50,000
Accounts Receivable: $20,000
Inventory: $30,000
Total Current Assets: $100,000

Non-Current Assets:
Property, Plant, and Equipment: $400,000
Intangible Assets: $50,000
Total Non-Current Assets: $450,000

Total Assets: $550,000

Current Liabilities:
Accounts Payable: $25,000
Short-term Debt: $20,000
Total Current Liabilities: $45,000

Non-Current Liabilities:
Long-term Debt: $100,000
Total Non-Current Liabilities: $100,000

Total Liabilities: $145,000

Shareholders’ Equity
Common Stock: $200,000
Retained Earnings: $205,000
Total Shareholders’ Equity: $405,000

Total Liabilities and Shareholders’ Equity: $550,000

Here’s what this balance sheet tells us about Healthy Foods Inc.:

The balance sheet also demonstrates the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity. In this case, $550,000 (Total Assets) = $145,000 (Total Liabilities) + $405,000 (Total Shareholders’ Equity).

By examining this balance sheet, stakeholders can gain insight into Healthy Foods Inc.’s financial position, liquidity, solvency, and the company’s strategies for financing its assets. For instance, the company has more equity financing than debt, suggesting a conservative approach to financing. Additionally, a relatively high amount in retained earnings shows a commitment to reinvesting profits back into the business.

Other Posts You'll Like...

Want to Pass as Fast as Possible?

(and avoid failing sections?)

Watch one of our free "Study Hacks" trainings for a free walkthrough of the SuperfastCPA study methods that have helped so many candidates pass their sections faster and avoid failing scores...