What Is a Balance Sheet?
A balance sheet shows what your business owns and owes at a point in time. Learn to read one and what it tells you.
Key Takeaways
- Assets = Liabilities + Equity — the balance sheet always balances
- Current assets and liabilities mature within 12 months; non-current are longer-term
- Equity is what is left after all liabilities are paid — the owners' stake
- A healthy balance sheet has more assets than liabilities and growing equity
The fundamental equation
A balance sheet is built on one equation: Assets equals Liabilities plus Equity. Assets are everything your business owns or is owed. Liabilities are everything your business owes to others. Equity is what remains for the owners after liabilities are subtracted from assets. This equation always balances.
Assets
Current assets convert to cash within 12 months: cash itself, accounts receivable, and inventory. Non-current assets are longer-term: property, equipment, vehicles, and intangibles like patents or goodwill. Total assets represent the full economic resources your business controls.
Liabilities
Current liabilities are due within 12 months: accounts payable, VAT due, short-term loans, and deferred revenue. Non-current liabilities are longer-term: bank loans, lease obligations, and deferred tax. Total liabilities represent all claims on your business by parties other than the owners.
Equity
Equity is the owners' stake — what would be left if you sold all assets and paid all liabilities. It comprises share capital (original investment), retained earnings (accumulated profits not yet distributed), and reserves. Growing retained earnings year on year is one of the clearest signs of financial health.
Reading a balance sheet
Look for three things. Is equity positive and growing? Is the current ratio (current assets divided by current liabilities) above 1? A ratio below 1 means you may struggle to meet short-term obligations. Is debt at a manageable level relative to equity and operating profit?