Page 152 - Account 10

ii. To see the details of the structure of capital i.e. the equity capital, preference capital
and loan capital and assets so that, necessary improvements, to make an optimal
structure, can be made.
iii. To satisfy the legal obligation. It is legally a must for the joint stock companies to
prepare a balance sheet and other financial statements and should get them audited
in time at the close of each accounting year. It can also be produced as a proof when
disputes take place regarding its items i.e. capital, liabilities and assets.
iv. To measure the short term liquidity of a firm by comparing the current assets and
current liabilities. Similarly, to see the long term solvency of a firm.
v. To make an easy valuation of a firm when it is sold or liquidated. A balance sheet
provides a base for such a valuation.
vi. To support for planning, policy making, decision making, etc. by supplying reliable
information.
vii. To provide interpretation of various ratios and comparative study.
viii. To serve as an evidence for settling disputes.
ix. To help to evaluate the strengths and weaknesses of the business.
x. To know the amount of trade debtors and creditors.

11. Importance/Advantages of Balance Sheet
A balance sheet is a very important financial document of a business concern. The
importance of a balance sheet may be studied in term of the following advantages:
i. It depicts the true financial position of a business firm by presenting true value of
assets, capital and liabilities at a certain period.
ii. It shows the structure of assets, capital and liabilities. Thus, necessary ratios, for
short term liquidity and long term solvency can be calculated and efforts can be
made for improvement, if required.
iii. It satisfies the legal formalities in the case of joint stock companies and can also be
produced as a proof when required.
iv. It gives knowledge about the debtors and creditors and thus efforts can be made for
timely collection from the debtors and making payment to the creditors. It increases
reliability and confidence.
v. It helps in the valuation of a firm or company, specially at the time of selling or
liquidation.
vi. It also gives knowledge about the profit/loss of the entire organization as the profit/
loss is transferred to capital A/c in the balance sheet.
vii. It helps for settling disputes.
Since, it provides the real information about the financial position of a firm, it creates
confidence to the creditors (loan creditors) and banks, and thus, becomes easy for
obtaining loan and other credit facility.

12. Terms that Appear in Assets Side in Balance Sheet (Assets
and Their Classification)

Assets are those physical or non-physical i.e. tangible or intangible properties, which
are acquired by a business firm at a measurable monetary value. Assets are acquired to
increase the efficiency of a firm. There may be various types of assets. They are:

152 Aakar’s Office Practice and Accountancy - 10 Final Accounts 153