Balance Sheet- Meaning, Components and Importance

In the accounting world, the progress of the business is communicated by the use of financial statements. Three types of financial statements are known in accounting which are income statement, cash flow statement and balance sheet.

Each statement serves a different purpose in conveying business information and hence are important for the business. One such financial statement is the Balance Sheet which will be discussed in this article.

What is a Balance Sheet?

The balance sheet is a financial statement which shows the financial condition of a business on a given date. It is also known as the statement of net worth. The balance sheet includes assets and liabilities on two sides.

The components of a balance sheet are 1) Assets, 2) Liabilities and 3) Shareholder’s equity also called Capital.

Assets: Assets are known as those resources that are owned by the organisation/business. They are of two types: current assets and non-current or long term assets. In a balance sheet, assets are seen on the left side.

Liabilities: Liabilities are the amount that a company owes to its creditors. It is an obligation or debt for a business. Liabilities are of two types: current and non-current or long term liabilities.

Equity: It is the amount that the owners or shareholders have invested in the business. It is also of two types based on the structure of the company. If a company is sole-proprietorship, it is treated as owner’s equity while for a corporation, it is treated as shareholders equity.

The basic accounting equation is represented as Assets = Liabilities + Equity.

Importance of Balance Sheet

A balance sheet is important in the following ways:

  1. It is an essential financial statement which helps creditors, investors and stakeholders to determine the financial health of the company.
  2. It helps determine the growth of the organisation by comparing previous years balance sheets.
  3. Stakeholders can determine the business performance and liquidity position of a company.

To learn more about the accounting concepts such as cash flow, the scope of financial management, depreciation, stay tuned to BYJU’S.

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