What is the purpose of a balance sheet?

A balance sheet serves the purpose of summarizing an entity’s financial position at a specific point in time. It provides a snapshot of what the business owns (assets) and what it owes (liabilities), along with the equity owned by the shareholders. This financial statement is essential as it highlights the net worth of the entity, allowing stakeholders, such as investors, creditors, and management, to assess financial health, solvency, and liquidity.

Tracking cash flow pertains to a cash flow statement, which details the movement of cash in and out of the business over a period. Reporting income and expenses is the domain of an income statement, which outlines profitability over a certain timeframe rather than providing a snapshot of financial standing. Outlining financial goals is more of a strategic planning function rather than a financial reporting purpose, making it unrelated to the core function of a balance sheet.