In plain English
It lists assets, liabilities and equity at one moment. Assets must equal liabilities plus equity.
Reading it alongside the profit and loss shows both what was earned and what the business is worth on paper.
Why it matters
The profit and loss tells you how a period went. The balance sheet tells you where you stand right now: how much cash you have, what customers owe, what you owe, and how much the owner has in the business. Many bookkeeping errors that stay hidden on the profit and loss show up here as odd balances.
Banks, landlords and buyers ask for it because it shows whether the business can meet its obligations. A balance sheet with negative cash, stale payables or a large unexplained account will raise questions in any loan review.
Worked example
Assets $29,000; liabilities $16,000; equity $13,000. $16,000 + $13,000 = $29,000, so it balances.
How to handle it
- Run the balance sheet as of the last day of the month after reconciling bank and card accounts.
- Tie each major line to a source: cash to bank statements, receivables to the aging, loans to lender statements.
- Look for any account with a balance that should be zero, such as clearing accounts or uncategorized items, and investigate.
- Compare it with the prior month and ask why each large change happened.
- Save a copy at each month end so you can tell if prior periods change later.
Common mistakes
- Reviewing only the profit and loss, so balance sheet errors like duplicate loans or negative payables go unnoticed for months.
- Accepting a balance sheet that does not match the bank, which means the profit figure built from the same data is also suspect.
- Letting old opening balance equity or suspense amounts sit unexplained, which makes equity hard to understand.
- Running the report on cash basis by accident, which drops receivables and payables and changes the picture.
Not the same as: Income statement (profit and loss)
The balance sheet is a snapshot of what you own and owe on one date. The income statement covers a span of time and shows revenue, expenses and profit. See Income statement (profit and loss).
Go deeper
- How to Read a Small Business Balance Sheet: A guide to reading a balance sheet line by line: assets, liabilities, equity, what healthy looks like, and red flags that deserve a question.
Try it
Related terms
- Bank reconciliation: Comparing your books to the bank statement so both agree after accounting for timing differences.
- Bookkeeping: The ongoing recording and organizing of a business's financial transactions.
- Bad debt: A receivable you have decided you will not collect, written off as an expense.
Common questions
What is a balance sheet?
A report showing what a business owns, owes and the owner's stake on a specific date.
Can you give an example of balance sheet?
Assets $29,000; liabilities $16,000; equity $13,000. $16,000 + $13,000 = $29,000, so it balances.
Why is there an account called opening balance equity?
Some software creates it when you enter starting balances. It is meant to be temporary, and its balance should be reviewed and moved to the right equity account.
How often should a small business look at its balance sheet?
Monthly is a good habit, right after reconciling. A quick look catches errors while they are still easy to trace.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.