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Balance Sheet

1. A statement of the financial position of a firm at a given date. It shows the type and value of sources from which funds have been derived and the various ways in which these funds have been invested and applied. The conventional balance sheet consists of two vertical columns. In the United Kingdom, liabilities are set out on the left-hand column and assets on the right (in USA the positions are reversed). The left-hand side (liabilities) is sometimes described as ‘capital employed’ or ‘sources of funds’ and the right-hand side (assets) as ‘employment of capital’ or ‘disposal of funds’. A balance sheet may also be set out in one table or column.

2. A summary at a given date of the sources from which a person or organisation has derived capital, and the uses to which it has been put. The original balance sheet of a business shows capital assets. As debts are incurred this becomes capital + liabilities = assets. As operations are undertaken this formula becomes capital + liabilities + revenues = assets and expenses. The practice of preparing periodic balance sheets enables revenues and expenses of the period to be offset in a separate statement (c.f. PROFIT AND LOSS ACCOUNT) in which a profit or loss is calculated. Thus, the annual balance sheet of a business shows capital + liabilities + profits (or losses) = assets, but the profit is reduced by the proprietor’s withdrawals (dividends or drawings).

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