What is the primary purpose of preparing a balance sheet?

The primary purpose of preparing a balance sheet is to provide a snapshot of a company's assets and liabilities at a specific point in time. This financial statement gives stakeholders, including management, investors, and creditors, a clear view of the company's financial position. By listing total assets, total liabilities, and the equity of the shareholders, a balance sheet helps assess the company's leverage, liquidity, and overall financial health.

It distinguishes itself from other financial statements through its focus on what a company owns versus what it owes, thus serving as a vital tool for making informed business decisions. Understanding the composition of the balance sheet can also help stakeholders evaluate the company's ability to meet its short-term and long-term obligations, which is crucial for managing risk and determining the financial viability of the business.