How to Read Your Balance Sheet
Your Balance Sheet is a snapshot of your financial position at a specific date — what you own, what you owe, and what's left for the owners. Here's how to read it.
Your Balance Sheet is a snapshot of your business's financial position at a specific point in time — what you own (assets), what you owe (liabilities), and what's left over for the owners (equity). Unlike the P&L, which covers a period of time, the Balance Sheet shows where things stand on a single date.
The fundamental equation that always holds: Assets = Liabilities + Equity
The Structure of a Balance Sheet
Assets
Current Assets — expected to be converted to cash or used within 12 months:
- Cash and bank accounts
- Accounts Receivable (money owed to you)
- Inventory (if applicable)
- Prepaid expenses
Fixed Assets (Non-Current Assets) — long-term assets used over multiple years:
- Equipment
- Vehicles
- Leasehold improvements
- Less: Accumulated depreciation (shown as a negative — reduces the asset to book value)
Total Assets = Current Assets + Fixed Assets
Liabilities
Current Liabilities — due within 12 months:
- Accounts Payable (bills you owe)
- GST/HST Payable
- Payroll Liabilities
- Current portion of long-term debt
Long-Term Liabilities — due beyond 12 months:
- Business loans (non-current portion)
- Line of credit
Total Liabilities = Current + Long-Term
Equity
For sole proprietors:
Owner's Capital + Net Income minus Owner's Drawings
For corporations:
Share Capital + Retained Earnings
Total Equity = Total Assets minus Total Liabilities
How to Actually Read It
Check that it balances.
Total Assets should equal Total Liabilities + Total Equity. If it doesn't, something is wrong in the books. This is your bookkeeper's job to maintain, but it's worth verifying.
Look at your current ratio.
Current Assets divided by Current Liabilities. If the result is above 1.0, you have enough short-term assets to cover short-term obligations. Below 1.0 means you may face a cash shortfall in the coming months.
Check your accounts receivable.
Is it higher than expected? That means you have outstanding invoices that haven't been collected. Review the AR aging report to see who owes you and how old the balances are.
Check your accounts payable.
Are there bills you've forgotten to pay? The AP balance should be explainable — run the AP aging report to see the details.
Look at retained earnings.
For corporations, retained earnings is the cumulative profit since inception. Growing retained earnings over time means the business is consistently profitable. A negative retained earnings balance means cumulative losses exceed cumulative profits.
FAQ
Why does the Balance Sheet look different from month to month when no major events happened?
The Balance Sheet changes every time a transaction is recorded — each invoice, payment, or expense shifts the numbers slightly. Month-to-month changes reflect normal business activity.
What's the difference between the Balance Sheet and the P&L?
The P&L covers a time period (what happened this month/year). The Balance Sheet is a point-in-time snapshot (where things stand today). The two are connected: net income from the P&L flows into retained earnings on the Balance Sheet at year-end.
My cash on the Balance Sheet doesn't match what I see in my bank account. Why?
Usually because of timing — a transaction recorded in QBO that hasn't cleared the bank yet, or vice versa. If the discrepancy is significant, tell your Mesa CPA bookkeeper.
What does negative equity mean?
It means liabilities exceed assets — the business owes more than it owns. Common in early-stage businesses (startup losses), but concerning if it persists. Your Mesa CPA advisor can help you understand the implications for your specific situation.