What is Balance Sheet?

Where the income statement covers a period, the balance sheet is a snapshot at one moment, usually the last day of a month or year. It always balances: assets equal liabilities plus equity.

The three sections

• Assets: cash, accounts receivable, inventory, prepaid expenses, equipment net of accumulated depreciation
• Liabilities: accounts payable, credit cards, sales tax payable, payroll liabilities, loans
• Equity: owner contributions, draws or distributions and accumulated profits; see owner's equity

Assets and liabilities are usually split into current, due or usable within a year, and long-term.

Why it matters

• Cash reality: profit on the income statement does not show where the money went; the balance sheet does
• Loan applications: lenders look at debt, working capital and equity
• Error detection: a bank balance that does not match the statement, negative payables or old suspense balances signal bookkeeping problems
• Tax returns: many business returns include a balance sheet, and the IRS's Instructions for Form 1120-S describe when Schedule L is required for S corporations

Reviewing it monthly

1. Confirm cash agrees with reconciled bank statements
2. Compare receivables and payables totals with aging reports
3. Check loan balances against lender statements
4. Confirm payroll and sales tax liabilities reflect only current amounts
5. Investigate any unusual or negative balances

Common problems

Owner personal expenses recorded as assets, loan payments recorded entirely as expenses, and uncleared suspense account balances are among the most frequent issues we fix during catch-up bookkeeping.

Related terms

• Accounts Receivable: Accounts receivable is money customers owe your business for goods or services already delivered.
• Accounts Payable: Accounts payable is the money your business owes suppliers and vendors for goods or services received but not yet paid for.
• Assets: Assets are resources a business owns or controls that are expected to provide future economic benefit.
• Liabilities: Liabilities are amounts a business owes to others, such as suppliers, lenders, employees and tax authorities.

Browse more definitions in the small business glossary.