Balance sheet

The financial statement of what a company owns and what it owes at a particular date, known as the statement of financial position in the United States. Traditionally, the left-hand side of the balance sheet is a schedule of the company's assets (land, buildings, plant and equipment, cash and inventories); the right-hand side is a statement of the liabilities, either real or potential. Real liabilities comprise the debts the company must pay - that is, creditors - plus its loans. Potential liabilities are the allowances that are likely to be paid: deferred taxes and, increasingly, post-retirement benefits for employees. The remaining item on the right-hand side is the shareholders' interest in the business. This is technically not a liability at all, but a statement of the risk capital subscribed to the business adjusted by the aggregate of retained earnings and (possibly) revaluation of some assets.

Annual report

All companies whose owners have a limited liability to the financial obligations of their company must publish an annual report, which is sent to the owners and lodged with a central authority for public inspection. For companies whose shares are listed on a recognised stock exchange, the annual report will almost certainly contain a mix of statutory information and information given voluntarily by the management. The statutory information includes a profit and loss account (income statement in the United States), balance sheet (statement of financial position in the United States) and cash flow statement, together with explanatory notes to these.

Advance corporation tax

A taxation system used by the UK government to take a slice of income from the dividends that companies paid to their shareholders. However, advance corporation tax (ACT) had a penal effect on UK-based companies that made most of their profits overseas and was abolished in April 1999. Thus companies no longer have to pay the government 25% of the amount of the dividend that they paid to their shareholders. Correspondingly, shareholders no longer receive a tax credit equal to the value of the ACT paid. The exception to this rule, however, is that private investors still get a small tax credit, equal to 11% of the dividend that they receive, which they can offset against their tax liability.

Asset

For something so fundamental to investment the surprise is that the definition of an asset is so vague. The US accounting standards body has defined it as being "probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events". However, within the context of a company's balance sheet, an asset is also a deferred cost. If a company shows plant and equipment of £1m in its balance sheet, that represents past expenditures which have yet to be written off and which, according to the accruals concept of accounting, will be depreciated as the plant is used up. The test of whether the plant is ultimately an asset or a liability will be whether it generates after-tax revenue greater than its cost. For a company to survive, most plant and equipment must pass that test. But for other items which are carried forward as assets, such as the deferred cost of a pension fund, there is no suggestion that they can bring economic benefits.

More generally, the broad categories of investments within a portfolio - shares, bonds, property - are known as assets. Hence the term asset allocation.