The Balance Sheet Explained: What Every Business Owner Should Know

Most small business owners are familiar with the profit and loss statement. Fewer pay attention to the balance sheet — and that's a mistake. The balance sheet gives you a snapshot of your business's financial position at a specific point in time.

The balance sheet is built on one fundamental equation:

Assets = Liabilities + Equity

This equation must always balance. If it doesn't, something is wrong with your books.

Assets are everything your business owns or is owed:

• Current assets: Cash, accounts receivable, inventory (expected to convert to cash within a year)
• Fixed assets: Equipment, vehicles, real estate (long-term)
• Other assets: Deposits, prepaid expenses

Liabilities are everything your business owes:

• Current liabilities: Accounts payable, credit card balances, short-term loans (due within a year)
• Long-term liabilities: Business loans, mortgages

Equity is the owner's stake in the business — what's left after subtracting liabilities from assets. For a sole proprietor or LLC, this includes owner contributions, retained earnings, and owner draws.

When reviewing your balance sheet:

• Is cash healthy? Do you have enough to cover near-term obligations?
• Are receivables growing? A rising A/R balance may mean collections are slow.
• Is debt manageable? Compare liabilities to assets — high leverage is a risk.
• Is equity growing? Increasing equity over time means your business is building value.

The P&L shows performance over a period. The balance sheet shows position at a point in time. Together, they tell the complete financial story of your business. See our guide on how to read a profit and loss statement for the other half of the picture.

• How to Read a Profit & Loss Statement
• Bank Reconciliation Explained
• The Small Business Owner's Guide to Bookkeeping
• LLC Bookkeeping: What Every Owner Needs to Know
• Our Bookkeeping Services
• Contact Us

Get accurate monthly financial statements — P&L, balance sheet, and cash flow — with every Gap ProAdvisors bookkeeping plan. See our plans or contact us.