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Meaning

Balance sheet is a mirror which reflects the true position of assets and liabilities on a particular date. Trading and profit and loss account shows gross profit or gross loss and net profit or net loss respectively. These accounts deal with expenses, income and receipts, i.e., revenue receipts and payment. The firm also makes certain capital expenditure and gets capital receipts. It owns certain assets and also certain liabilities. These assets and liabilities show that the financial position of the firm. This is why, Balance sheet is also known as position statement. We adopt double entry system of accounting, where every debit has got its corresponding credit. According to our accounting equation also:

Assets = Liabilities +Capital.

It means that the total of the assets side of Balance sheet must be equal to the total of liabilities. Liabilities consist of creditor’s equity (liability) and proprietor’s equity. In other words, creditors and proprietor’s claim against the firm must be equal to its assets. If assets and liabilities of Balance sheet do not tally, there is definitely certain mistake. According to Freeman “A Balance sheet is an item wise list of assets, liabilities and proprietorship of a business at a certain date “.