Question

Discuss the need of preparing a balance sheet.

Answer 1

A balance sheet is the mixed list of the assets, liabilities and proprietorship of business of an individual at a certain date. The preparation of balance sheet is needed for the following purposes.

(i) To know the financial position : Balance sheet shows the financial position of firm. It is the list of assets and liabilities of the firm on a specific date generally at the end of the financial year.

(ii) Inform about the Liquidity Position : A balance sheet tells us about current assets and current liabilities. If the current assets are double of current liabilities, it is a symbol of healthy and sound liquidity position of the firm.
Hence, it can be said that a balance sheet has to be prepared to know the financial position of the business and the nature and values of its assets and liabilities. All the accounts which have not been closed till the preparation of the Profit and Loss account are shown in the balance sheet. Assets and liabilities shown in the balance sheet are marshalled in order of liquidity or in order of permanence.