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Balance sheet

Updated: Aug 20, 2021

A statement produced by an organization, whether run for profit or not. showing the financial position of that organization at a particular date. This date is irmally at the termination of an accounting period, which, in the case of companies, will almost always be at the end of a financial year. It is a kind of statement of affairs, which lists and distinguishes between the various assets and liabilities of the organization at that date.

The traditional balance sheet is twosided, the liabilities being shown on the left-hand side and the assets on the right. There is, however, an increasing tendency to adopt the vertical form of presentation which, among other things, avoids the confusion engendered in the layman’s mind by the appearance of the owner’s capital as a ‘liability’. The vertical form lists the fixed assets and adds the net current assets to them. The total is described as ‘net capital employed’. There follows a summary of what this capital consists of, distinguishing between loans and the capital subscribed by the proprietor(s), to which retained profits or surpluses are added. This list of contributors of capital may also inelude long-term creditors and reserves for taxation (or other defined purposes).

The balance sheets of limited companies are governed by, and must conform to, the various provisions contained in company law and, in particular, must be prepared in accordance with the fourth schedule to the 1985 Companies Act, which has replaced the Eighth Schedule to the 1948 Act. The new Schedule contains a choice of two formats, one of which, subject to the notes also contained in the Schedule, must be selected as the form in which the balance sheet is to be shown. There is, however, an overriding provision in the 1985 Act which effectively allows the formats to be varied if. and only if, such a variation is essential to the presentation of a true and fair view of the state of affairs of the company. The balance sheet is the principal document to be attached to a company’s annual return.

Reference: The Penguin Business Dictionary, 3rd edt.

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James Knight
Editor of Education
James is a lead content editor for Invezz. He's an avid trader and golfer, who spends an inordinate amount of time watching Leicester City and the… read more.