Question

What is the purpose of the balance sheet? Be sure to discuss the three key elements that make up the balance sheet.

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Answer 1

A balance sheet is a financial statement which represents the worth of the company and its business at a given point in time. The Balance sheet details what it owns and to whom it owns to. The purpose of the Balance Sheet is to show the break up of the total assets between the outsider liabilities and owners' equity at a point of time.

The balance sheet of a company has three key elements, which are : (1) Assets, which includes all the current and long-term assets or fixed assets which the company owns, (2) Liabilities, which includes the current and long-term liabilities payable to the outsiders by the company, (3) Shareholders' equity, it constitutes all that belongs to the Shareholders who are the legal owners of the company, which includes equity capital and retained earnings. The total of its assets is equal to the sum of the Shareholders' equity alongwith the Liabilities.