Balance Sheet Basics for Small Business Owners

The P&L shows performance over time. The balance sheet shows your business's financial position at a single moment: what you own, what you owe and what's left for you.

The basic equation

Assets = Liabilities + Equity

It always balances. If it doesn't, something in your books is wrong.

Assets: what the business owns

Current assets (cash or things that become cash within a year):

• Checking and savings accounts
• Accounts receivable (unpaid customer invoices)
• Inventory
• Prepaid expenses

Fixed assets (long-term):

• Vehicles, equipment, tools, computers
• Less accumulated depreciation

Liabilities: what the business owes

Current liabilities (due within a year):

• Credit card balances
• Accounts payable (unpaid bills)
• Sales tax collected but not yet paid
• Payroll taxes owed
• The current portion of loans

Long-term liabilities:

• Equipment loans, vehicle loans, SBA loans

Equity: the owner's stake

• Owner contributions
• Owner draws or distributions (which reduce equity)
• Retained earnings (accumulated profits left in the business)
• Current year net income

What to check every month

Cash balances match the bank

Every bank account on the balance sheet should match your reconciled statement balance.

Accounts receivable is realistic

Old unpaid invoices may need follow-up or a write-off.

Sales tax payable makes sense

It should roughly equal the sales tax you collected but haven't paid yet.

Credit card balances match statements

A credit card with a negative balance or a balance that never changes usually means something was miscategorized.

No mystery accounts

Watch for "Opening balance equity," "Uncategorized asset" or "Ask my accountant" balances. These need to be cleaned up.

Useful balance sheet ratios

• Current ratio = current assets ÷ current liabilities. Above 1 means you can cover short-term bills.
• Debt-to-equity = total liabilities ÷ total equity. It shows how much the business relies on borrowing.

Why the balance sheet matters

• Lenders look at it closely
• S-corps and partnerships report balance sheet information on their tax returns
• It catches bookkeeping errors the P&L can hide
• It shows whether your business is building value over time

The bottom line

The balance sheet is your business's financial snapshot. Check it monthly with your P&L, and make sure every balance can be explained.

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Need help getting this right? TRIG Bookkeeping & Tax Services helps new business owners in Washington with company registration, monthly and annual bookkeeping, and government compliance. Contact us to talk about your business.

This article is general information, not legal or tax advice for your situation. Tax rules and fees change, so confirm current details with the IRS, the Washington Department of Revenue, or a qualified professional.