A balance sheet is a snapshot on one date showing assets, liabilities and equity. Assets equal liabilities plus equity, and it shows your cash, what you owe and what the business is worth on paper.
1A snapshot, not a period
Unlike the profit and loss, the balance sheet shows one moment in time, such as the last day of the month.
2The three parts
- Assets: what the business owns, such as cash, receivables and equipment
- Liabilities: what it owes, such as credit cards, loans and unpaid bills
- Equity: what is left for the owner after liabilities
The basic equation is assets = liabilities + equity. If it does not balance, something is wrong.
3What to check
- Does the cash balance match your bank?
- Are customer balances reasonable and current?
- Are there old unpaid bills or odd credit balances?
- Do loan balances match lender statements?
- Are there accounts with unexplained balances?
If the balance sheet cash does not match your bank, stop and reconcile before trusting any other report.
4How it connects to the P&L
Net profit from the profit and loss flows into equity on the balance sheet. Together they show how the business performed and where it stands.
5Why it matters
Lenders, investors and buyers read the balance sheet closely. A clean one shows that your records are reliable.
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