Accounting Tutorials
- Learn Basic Accounting in Less than 1 Hour!
- Accounting Basics
- What are Accounting Principles
- Accounting Equation Formula
- Accounting Cycle
- Accrual Accounting Basis
- Cash Basis Accounting
- Matching Principle of Accounting
- Conservatism Principle of Accounting
- GAAP (Generally Accepted Accounting Principles)
- Materiality Concept
- Accounting Transaction
- Accounting Transactions Examples
- Going Concern
- Cost Benefit Principle
- Cost Principle
- Accruals in Accounting
- Revenue Recognition Principle
- Prudence Concept in Accounting
- Cash Accounting
- What are Accounting Policies?
- Relevance in Accounting
- Accounting Estimates
- Mark to Market Accounting
- Prior Period Adjustments
- Cash Accounting vs Accrual Accounting
- Break Even Point In Accounting
- Operating Cycle
- Fiscal Year
- Fiscal Year vs Calendar Year | Top Differences | Examples |
- Financial Reporting
- Financial Statements
- Types of Financial Statements
- Components of Financial Statements
- Financial Statement Examples
- Accrual vs Provision
- Accrual vs Deferral
- Temporal Method
- Interim Financial Statements
- Pro Forma Financial Statements
- Consolidated Financial Statement
- Users of Financial Statements
- Financial Statement Limitations
- Objectives of Financial Statements
- Importance of Financial Statements
- Audited Financial Statements
- Financial Statement Audit
- Internal Audit vs External Audit
- Interim Reporting
- Accounting Scandals
- Quality of Earnings
- Audit Report
- Audit Report Format
- Audit Report Types
- Audit Assertions
- Audit Report Contents
- Audit Report Examples
- Audit Report Qualified Opinion
- Audit Risk
- Sunk Cost
- Cash Receipt
- Manufacturing vs Production
- Leasehold vs Freehold
- IFRS vs US GAAP
- IFRS vs Indian GAAP
- Accounting for Fair Value Hedges
- Bookkeeping
- Debit vs Credit in Accounting
- Single Entry System in Accounting
- Double Entry Accounting System
- Journal in Accounting
- Contingent Liability Journal Entry
- Journal Entry Examples
- Compound Journal Entry
- Accounts Payable Journal Entries
- Depreciation Journal Entry
- Accrued Expense Journal Entry
- Adjusting Entries in Journal
- General Journal
- Accounting Journal Entry
- Contra Account
- Ledger in Accounting
- Accounts Payable Ledger
- T Accounts
- Account Balance
- Journal vs Ledger
- General Ledger vs Sub Ledger
- General Journal vs General Ledger
- General Ledger vs Trial Balance
- What is Trial Balance ? | Examples | Steps | Prepare | Errors
- Trial Balance Examples
- Post Closing Trial Balance
- Balance Sheet Reconciliation
- Closing Entries in Accounting
- Suspense Account
- Nominal Account
- Adjusted Trial Balance
- Reconciliation of Books | Types, Best Practices | Useful Tips
- Petty Cash | Meaning | Template | Accounting | Example
- Petty Cash Book
- Debit Note | Debit Notes Accounting & its Top Characteristics
- Credit Note
- Debit Note vs Credit Note | Top 7 Differences (Infographics)
- Drawing Account
- Balance Sheet
- Balance Sheet
- How to Read a Balance Sheet?
- Balance Sheet Formula
- Classified Balance Sheet
- Balance Sheet Equation
- Balance Sheet Examples
- Balance Sheet Purpose
- Balance Sheet Analysis
- Balance Sheet Items
- Capital Expenditure Formula
- Statement of Financial Position
- Accounting Equation
- Assets vs Liabilities | Top 9 Differences (with Infographics)
- Equity vs Assets
- Trial Balance vs Balance Sheet | Top 10 Differences You Must Know!
- Balance Sheet vs Consolidated Balance Sheet
- Bank vs Company Balance Sheet
- Banks Balance Sheet
- Commitments and Contingencies
- Management Discussion & Analysis
- Revenue Reserve vs Capital Reserve | Top 7 Differences
- Revenue Reserve
- Capital Reserve
- Capital Receipts vs Revenue Receipts | Top 8 Differences
- Capital Lease vs Operating Lease | Top Differences You Must Know!
- Debt vs Equity Financing | Advantages | Disadvantages | Example
- Internal vs External Financing | Top 7 Differences (Infographics)
- Available for Sale for securities
- Held to Maturity to securities
- Non-Performing Assets (NPA)
- Assets
- Asset Accounts
- Assets in Accounting
- List of Assets
- Types of Assets
- Examples of Assets
- Net Assets
- Book Value of Asset
- Fixed Assets Accounting
- Net Asset Formula
- Assets Formula
- Net Fixed Assets
- Cash and Cash Equivalents | Examples, List & Top Differences
- Cash Equivalents
- Restricted Cash
- 3 Types of Inventory | Raw Material | WIP | Finished Goods
- WIP Inventory (Work-in-Progress)
- Raw Material Inventory
- Inventory Write-Down
- Periodic Inventory System
- Ending Inventory Formula
- Average Inventory Formula
- Closing Stock
- Inventory vs Stock
- Current Assets
- Short Term Investments on Balance Sheet
- Current Assets vs Non-Current Assets
- Current Assets Examples
- Current Assets List
- Current Assets Formula
- Short Term Assets
- FIFO vs LIFO
- First In First Out (FIFO)
- Last in First Out (LIFO)
- LIFO Reserve
- LIFO Liquidation
- Non-Current Assets
- Accounts Receivables? | Definition, Accounting Examples
- Is Accounts Receivable an Asset?
- Accounts Receivable - Debit or Credit?
- Accounts Receivables Factoring
- Accounts Receivable Journal Entry
- Net Realizable Value Formula
- Trade Receivables
- Net Realizable Value (NRV)
- Allowance for Doubtful Accounts
- Accrued Revenue
- Deferred Revenue Examples
- Liquid Assets
- Financial Assets
- Financial Assets Examples
- Financial Assets Types
- Quick Assets
- Marketable Securities on the Balance Sheet | Top Examples
- Marketable Securities Examples
- Non-Marketable Securities
- Trading Securities in Balance Sheet
- Prepaid Expenses
- Prepaid Insurance
- Tangible vs Intangible Assets
- Tangible vs Intangible
- Contingent Asset
- Tangible Assets
- Deferred Tax Assets
- Capital Expenditure (Capex)
- Write-Off
- Capex vs Opex
- Salvage Value
- Residual Value
- Fixed Capital vs Working Capital | Top 8 Differences (Infographics)
- Impariment of Assets
- Goodwill
- Goodwill Formula
- Goodwill Impairment Test
- Intangible Assets
- Intangible Assets Examples
- Negative Goodwill
- Goodwill Valuation
- Capitalized Interest
- Liabilities
- Liabilities Accounting
- Liabilities Examples
- Types of Liabilities on Balance Sheet
- Accounts Payable | Days Payable Outstanding | Formula |
- Accounts Payable Examples
- Accounts Payable Credit or Debit
- Accounts Payable Cycle
- Current Liabilities | List of Current Liabilities on Balance Sheet
- Current Liabilities Formula
- List of Current Liabilities
- Current Liabilities Examples
- Non Current Liabilities Examples
- List of Non-Current Liabilities Examples
- Accrued Liabilities
- Accrued Expenses vs Accounts Payable
- Accrued Expenses
- Accrued Interest Formula
- Accrued Interest
- Notes Payable
- Accounts Payable vs Notes Payable
- Revolving Credit Facilities
- Bonds Payable Accounting
- Bad Debt Reserve Allowance
- Deferred Expenses
- Deferred Tax Liabilities
- Unearned Revenue (Sales)
- Deferred Revenue (Income)
- Revenue Expenditure
- Current Portion of Long-Term Debt (CPLTD) | Balance Sheet
- Long-Term Debt in Balance Sheet
- Financial Liabilities | Definition, Types, Ratios, Examples
- Financing Activities
- Long-Term Liabilities
- Liability vs Debt
- Accounts Receivable vs Accounts Payable
- Minority Interest
- Accounting for Convertibles
- Accounting for Derivatives
- Financial Lease vs Operating Lease
- Off balance Sheet Financing
- Finance vs Lease
- Bond vs Loan
- Triple Net Lease
- Credit Terms
- Debtor vs Creditor
- Shareholders Equity
- Shareholders Equity Statement
- Equity Formula
- Paid in Capital
- Shareholder's Equity Formula
- Equity Examples
- Shares Issued
- Proxy Statement
- Negative Shareholders Equity
- Par Value of Stock
- Nominal Value of Shares
- Par Value of Share
- Premium on Stock
- Ordinary Shares Capital
- Share Classes
- Ordinary Shares
- Book Value of Equity
- Shares Premium
- Share Capital
- Stock Certificate
- Common Stock Formula
- Class A Shares
- Diluted Shares
- Stock Dilution
- Floating Stock
- Outstanding Shares (Definition, Formula) | Stocks Outstanding
- Issued vs Outstanding Shares
- Additional Paid-in Capital on Balance Sheet
- Retained Earnings (Formula, Examples) | How to Calculate?
- Retained Earnings Formula
- Statement of Retained Earnings
- Appropriated Retained Earnings
- Unappropriated Retained Earnings
- How to Calculate Net Worth of a Company | Formula | Top Examples
- Tangible Net Worth
- Owners Equity
- Owner's Equity Formula
- Owner's Equity Examples
- Preferred Shares
- Callable Preferred Stock
- Redeemable Preference Shares
- Non-Cumulative Preference Shares
- Participating Preferred Stock
- Weighted average Shares average outstanding
- Share Buyback
- Accelerated Share Repurchase
- Restricted Stocks Units (RSUs)
- Contingent Shares
- Stock Splits Share
- Reverse Stock Split
- Treasury Stock Shares
- Dilutive Securities
- Anti Dilutive Securities
- Dividend
- Dividend Policy
- Types of Dividends
- Dividend Examples
- Dividend Reinvestment Plan
- Dividends Ex-Date vs Record Date
- Dividend Declared
- Dividend Payable
- Stock Dividend
- Cash Dividend
- Final Dividend
- Preferred Dividends
- Homemade Dividends
- Ex dividend date
- Date of Record of dividends
- Qualified vs Ordinary Dividend
- Equity vs Royalty
- Commodity vs Equity
- Shares vs Debentures
- Equity vs Shares
- Equity Shares vs Preference Shares
- Wealth vs Profit Maximization
- Cost of preferred Stock
- Common Stock vs Preferred Stock | Top 8 Differences You Must Know
- Stocks Vs Shares
- Shares Vesting
- Stock Warrant
- Non-Qualified Stock Options
- Stock Options Vs RSU
- Shareholder Equity vs Net Worth | Top 5 Differences You Must Know!
- Stock vs Option
- Stock vs Mutual Funds
- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Income Statement Basics
- Income Statement Examples
- Income Statement Formats
- Income Statement Template
- Income Statement Formula
- Multi Step Income Statement
- Profit and Loss Statement Template
- Profit And Loss Statement Format
- Book Profit
- Contribution Margin Income Statement
- Sales Revenue
- Variable Costing Income Statement
- Pro Forma Income Statement
- Purpose of Income Statement
- Cost of Goods Sold
- Cost of Goods Manufactured (COGM)
- COGS Formula
- SG&A Expenses (Selling, General & Administrative)
- Interest Expense Formula
- List of Operating Expenses
- Non Operating Income
- Pretax Income (Earnings Before Taxes)
- Income Tax Expense
- Earned Income
- Average Total Cost Formula
- Gross Profit
- Direct Costs
- Indirect Costs
- Prime Cost
- Duty vs Tariff
- EBITDA
- EBITDA Calculation
- Adjusted EBITDA
- EBIT (Earnings Before Interest and Tax)
- EBIT Calculation
- Net Operating Income
- Operating Income
- Operating Profit vs Net Profit
- Net Income Formula
- EBITDA Formula
- Operating Expense (OPEX)
- Interest Expense
- LTM EBITDA
- NOPAT
- Non Recurring Items
- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- Depreciation Expense Formula
- Depreciation Rate
- Straight Line Depreciation Method Formula
- Accumulated Depreciation Formula
- MACRS Depreciation
- Depreciation Tax Shield
- Accelerated Depreciation
- Written Down Value Method
- Depletion Expense
- EBITDA vs Operating Income
- Straight Line Depreciation Method
- Sum of Year Digits Method of Depreciation
- Declining Balance Method of Depreciation
- Land Depreciation
- Double Declining Balance Method
- Amortization of Intangible Assets
- Depreciation vs Amortization
- Unrealized Gains (Losses)
- Non Cash Expense
- Warranty Expense
- Other Expenses
- Accrued Income
- Share based compensation
- Restructuring Cost
- Extraordinary Items
- Interest Income
- Lease Payment
- Financing Costs
- Effective Tax Rate Formula
- Progressive Tax
- Taxable Income Formula
- Completed Contract Method
- Tax Shield Formula
- Double Taxation
- Marginal Tax Rate
- Tax Haven
- Net Loss
- Pro-Forma Earnings
- Margin vs Profit
- Net Operating Loss (NOL)
- Tax Shield
- Sundry Expenses
- Trade Discount
- Trade Discount vs Cash Discount
- Percentage of Completion Method
- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
- Above the Line vs Below the Line
- Operating Income vs Net Income
- Cost vs Expense
- Expense vs Expenditure
- Accounting Profit vs Economic Profit
- Income Tax vs Payroll Tax
- Tax credits vs Tax deductions
- Tax Evasion vs Tax Avoidance
- Regressive Tax
- Gross Income vs Net Income
- Profit vs Revenue
- Revenue vs Earnings
- Revenue vs Net Income
- Revenue vs Income
- Profit vs Income
- Revenue vs Sales
- Revenue vs Turnover
- Capitalization vs Expensing
- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- Variance Analysis
- Other Comprehensive Income
- Partial Income Statement
- Income Summary Account
- FOB Destination
- Explicit Cost
- Implicit Cost
- Direct cost vs Indirect Cost
- Fixed cost vs Variable cost
- Price vs Cost
- Hard Cost vs Soft Cost
- Period Cost vs Product Cost
- Overhead Costs
- Nopat vs Net Income
- Marginal Costing vs Absorption Costing
- Marginal Cost Formula
- Margin vs Markup
- Markup Formula
- Contribution Margin vs Gross Margin
- Cash Flow Statement
- Statement of Cash Flow
- Cash Flow Statement Examples
- Cash Flow Statement Importance
- Purpose of Cash Flow Statements
- Cash flow from Operations | Formula, Calculations & Examples
- Operating Cash Flow Formula
- Cash Flow from Investing Activities (Formula & Top Examples)
- Cash Flow From Financing Activities | Formula & Calculations
- Cash Flow Analysis
- Negative Cash Flow
- Pro Forma Cash Flow Statement
- Fund Flow Statement
- FFO (Funds from Operations)
- Direct vs Indirect Cash Flow Methods
- Cash flow vs Net Income | Key Differences & Top Examples
- Cash Flow vs Fund Flow | Top 8 Differences (with Infographics)
- Accounting Careers
- Accounting Interview Questions
- Financial Accounting Careers
- Top Accounting Firms
- Big Four Accounting Firms
- Forensic Accounting
- Cost Accounting
- Financial Accounting
- Accounting vs Engineering
- Finance vs Accounting
- Bookkeeping vs Accounting
- Accounting vs Auditing
- Audit vs Assurance
- Accountant vs Actuary
- Bookkeepers vs Accountants
- Accounting vs Financial Management
- Cost Accounting vs Financial Accounting
- Cost Accounting vs Management Accounting
- Financial Accounting vs Management Accounting
- Public vs Private Accounting
- Accounting vs CPA
- Controller vs Comptroller
- Personal Banker Job Description
- Accounting Firms in Australia
- Accounting Firms in Canada
- Top Accounting Firms in US
- Accounting Firms in Singapore
- Accounting Books
- Budgeting in Finance
- What is Budgeting?
- Budgeting Examples
- Master Budget
- Absorption Costing
- Incremental Costs
- Variable Costing
- Incremental Revenue
- Fixed Cost Examples
- Average Cost vs Marginal Cost
- Job Costing vs Process Costing
- Variance Analysis Formula
- Budgeting vs Forecasting
- Traditional Budgeting vs Zero Based Budgeting in Finance
- Fixed Budget vs Flexible Budget
- Zero Based Budgeting
- Traditional Budgeting
- Capital Budgeting Importance
- Purchasing vs Procurement
- Cost Center
- High-Low Method Formula
- EOQ Formula
Related Courses
What is the Purpose of Balance Sheet?
The purpose behind the preparation of Balance Sheet is to provide the financial status of the company at any specific point of time to multiple stakeholders or to potential stakeholders (management, shareholders, lenders, creditors).
- The Balance sheet is of great utility for Internal Stakeholders, External Stakeholders and also to a potential stakeholder/investors.
- The Balance Sheet of any organization generally provides details about debt funding availed by the Organization, Use of debt and equity, Asset Creation, Net worth of the Company, Current asset/current liability status, cash available, fund availability to support future growth etc.
Purpose of Balance Sheet for Stakeholders
Let’s try to understand the purpose of the Balance Sheet for various stakeholders and other relevant parties:
#1 – Management of the Company
source: Colgate SEC Filings
Management of the Company generally requires the details related to Companies debt funding status, liquidity situation assessment, trade receivables status, cash flow availability, the investment made in other assets and fund availability for future expansion to plan the future course of activities for the next time period. Management may decide to reduce the debt from its current level based on balance sheet representation as they feel that it’s relatively higher than the industry benchmark. Management of the Company may take a call on liquidity improvement measures if they feel that Company’s working capital cycle is relatively stretched based on Current asset/current liabilities status in the Balance Sheet. Therefore, Balance Sheet serves a larger purpose for the Management of the Company in identifying existing issues as well as anticipating future problems and to chart out a course correction plan.
#2 – Investors of the Company/Potential Investors
Investors in the Company Use Balance Sheet along with other financial statements to analyze the financial soundness of the Company. They also use trends of last few years by analyzing the numbers in a financial statement to understand the future growth potential of the Company and to make a decision to stay invested in the Company, increase/decrease the shareholding in the Company.
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Balance Sheet may also be used by potential investors or Companies looking to acquire businesses or looking to partner with Companies for their expansions.
#3 – Banks/Financial Institutions
Balance Sheet serves a very critical purpose of taking a decision to lend or not to lend for Banks. As Balance Sheet gives a stock of existing debt and equity composition and status of current assets and current liabilities, it helps Banks to analyze if the Company has already over-borrowed and it has limited ability to repay the debt. It also helps lenders analyze the liquidity situation of the Company, to decide on an amount of working capital/short-term loan, to set the drawing power limit against the short-term loan, monitoring of loan account and most importantly in decision-making for lending to a Company.
For existing Banks, Balance Sheet serves a critical purpose of tracking the fund flow and utilization of the already disbursed loan by analyzing the corresponding increase on the asset side. A careful analysis by Banks can help them in finding if the loan disbursed for a specific purpose is being used for the same purpose or being diverted by the Company for something else, which can give an early warning signal for a potential default in a loan.
That is precisely the reason, Bankers stipulate a condition for Companies to furnish their quarterly/annual Balance Sheet in a timely manner.
#4 – Customers/Potential Customers
The Balance Sheet of an Automobile parts manufacturing company, which is parts supplier to a Car Manufacturer is very critical. Because a Car Manufacturer would like to establish a relationship with a Company which is financially strong and stable. A Car Manufacturer would not like to face the risk of its suppliers stopping the operations and so the supply of parts to Car Manufacturer, which ultimately affects the operation of Car Manufacturer. Therefore, in such situation, the Car Manufacturer will do its own analysis of the Company’s existing debt, current liquidity situation and fund availability to support future growth to establish the financial soundness of the Company.
#5 – Raw Material Suppliers/Creditors
The Balance Sheet of the Company helps Suppliers/Creditors to understand the financial strength of the Company. A Company with relatively stronger financials enjoy better trust/comfort /terms from its creditors.
#6 – Government Agencies/Banking Regulators/Stock Market Regulators
Bankers do business with public deposits. Therefore, banking regulators use the Balance Sheet of the Companies to detect any possible malpractices/ fraudulent activities being undertaken by the Company in the larger public interest. Similarly, Stock market regulators also keep an eye on the Companies by screening through their financial statements/balance sheet to detect any misdeeds being done by Companies in the larger interest of retail investors in publicly traded Companies.
Purpose of Balance Sheet for Ratio Analysis
Balance Sheet Purpose for Ratio Analysis is given in the following table-
Liquidity Ratio Analysis
Turnover Ratios
- Receivables Turnover Ratio Analysis
- Inventory Turnover Ratio Analysis
- Accounts Payable Turnover Ratio Analysis
- Cash Conversion Cycle Analysis
Operating Efficiency Ratio Analysis
- Asset Turnover Ratio Analysis
- Net Fixed Asset Turnover
- Equity Turnover
Business Risk
- Financial Leverage Analysis
- Total Leverage
Financial Risk
- Leverage Ratio Analysis
- Debt to Equity Ratio Analysis
- Interest Coverage Ratio Analysis
- Debt Service Coverage Ratio (DSCR)
There are other financial ratios such as profitability ratios, return ratios, which can be calculated by using all financial statement (Balance Sheet, P&L Statement and Cash Flow). These ratios may be used by multiple stakeholders such as Investors, lenders, management, business partners to get a complete analysis of any organization.
Conclusion
- The Balance Sheet of a company gives a financial snapshot of the Organization at a specific point in time. Balance Sheet provides details of the Company’s capital structure, Gearing, liquidity condition, cash availability, asset creation over time and other investments of the Company.
- Balance Sheet serves a critical purpose for multiple stakeholders involved with the Company and many a time becomes a critical part of decision making by stakeholders.
- Though Balance Sheet alone has some limitation in providing complete financial health of the Company, Balance Sheet along with Revenue Statement and Cash Flow provides a complete analysis of the organization’s financial health.
- The Balance Sheet serves a very critical purpose for banking regulator/Share market regulator/retail investors in case of publically listed companies.
Recommended Articles
This has been a guide to the purpose of preparing a Balance Sheet. Here we discuss the purpose of the Balance Sheet for various stakeholders and for Ratio Analysis along with practical examples. You may learn more about Accounting from the following articles –
- Net Fixed Assets Formula
- Top 4 Types of Coverage Ratio
- Fixed Asset Turnover Ratio Formula
- Calculation of Equity Ratio
- What is Classified Balance Sheet?
- Current Assets Formula Calculation
- Cash Conversion Cycle Formula
- Profitability Ratios Formula
- What are Trading Securities in the Balance Sheet?
- Off-Balance Sheet Financing Meaning
- Banks Balance Sheet Meaning
- Trial Balance vs Balance Sheet Differences
