Following are the points that confirm why Balance Sheet is reflect the actual financial position of a business firm;
It tally sum of total assets with sum of total liabilities, and id the total assets exceeds the total liabilities, the financial position or health of a business firm is considered to be strong.
It shows how much other owes to a firm and how much a firm to owe to others in cash or credit.
It shows how much debt a firm is using relative to its equity.
It shows how quickly customers are paying their bills.
It shows whether a firm is able or in able to pay its short term obligations in a given period of time.
It shows how much assets and liabilities are generating while conducting financial transaction in an accounting period.
It shows whether the products are being returned at higher than average historical rates.
It shows in how many days, a firm can sell its inventories and how much inventories are in hand.
It shows whether the research and development budget is preparing satisfactory result or not.
It shows whether a firm is paying interest on its debt or not.
It shows where the profits are spend or reinvested or how much amount is distributed as a dividend to its shareholders.
It shows how much a firm has invested on the productive sectors to generate revenue and interest income.
It shows the increment and decrement on the owner’s equity which allows investors to see how much money has been generated through business transaction over a certain period of time.
It shows the market capitalization of a business firm.
It shows the reputation or goodwill of a business firm in form of intangible assets for gaining its multi-users and potential users.
Net profit or net loss of PL account is may increase or decrease the capital side of balance sheet.
Depreciation which is deducted from the assets is recorded on the debit side of PL Account.
An outstanding expense that is recorded on the respective heading of expenses of PL Account is recorded on the liabilities side of the balance sheet.
Provision for bad debt which is deducted from the debtor on balance sheet is recorded on the debit side of PL Account.
Balance sheet cannot be prepared without PL Account and PL Account failed to disclose the impact of revenue in absence of balance sheet.
The amount shown as cash or at the bank under current assets on balance sheet will be determine in part by the income and expenses recorded in the PL Account.
Short-term loan which is shown in balance sheet under current liabilities, interest payment on such loan is recorded on the expenditure column of PL Account and these figure effect net profitability of a firm.
PL Account explains the changes in the owner’s capital or equality between the opening and closing balance sheet of an accounting period.
Balance sheet shows the transactions remaining for the execution as a result of the transactions of the PL Account.
Increased or decreased sales revenue recorded on PL Account determine the amount of assets shown on balance sheet.
Decreased or increased amount of cost of goods sold recorded on PL Account positively or negatively affect the level of inventory that is shown in Balance Sheet.
Amount of Net profit and Net loss shown in PL Account determine the amount of Dividend shown in the liabilities side of Balance Sheet.
Increased operating expenses recorded on PL Account negatively impact prepaid expenses on balance sheet.
Income Tax recorded on the debit side of PL Account affect accrued expenses payable on the liabilities side of balance sheet.
PL Account reveals money spent or cost incurred in a firm’s effort to generate revenue while Balance Sheet reveals whether a firm has sufficient cash or equivalent to spend on.
By observing the above facts about the balance sheet and PL Account, we can conclude that balance sheet and PL Account are not only comparative but also supplementary to each other.
