What is a Balance Sheet?
A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
Definition
A Balance Sheet is a snapshot of the business on one date. On the books, this is the statement where assets, liabilities, and equity are listed together and must add up.
That equation has to hold, or the snapshot is not finished. Assets always equal liabilities plus equity.
The date is the whole point. A Balance Sheet for March 31 is not a story of March; it is a picture of that day.
If you keep accrual books, the snapshot includes unpaid customer invoices and unpaid vendor bills. A cash-basis snapshot mostly shows cash, loans, and equity.
Where it shows up
Balance Sheet: The full report: assets, then liabilities, then equity, one date.
P&L: Related to net income that flows into equity.
Cash flow: Related to why cash changed between two snapshots.
See also: Assets · Liabilities · Equity
When you look at your reports, the Balance Sheet is the one that answers three questions at once. Assets sit at the top, then liabilities, then equity.
A high asset total is not automatically healthy. It can mean more cash, or it can mean more unpaid invoices and more flour sitting on the shelf.
On the Statement of Cash Flows, the opening and closing cash lines are the cash balances from two Balance Sheets. The Statement of Cash Flows explains the movement; this statement just shows each ending cash number.
Many small-business packs also print a comparative column. That lets you read this month's snapshot next to last month's without opening a second file.
Current assets and current liabilities sit near the top of each half so you can see short-term cushion. Longer-lived items sit lower on the page.
How it works
Every posted transaction hits the Balance Sheet, even when it also hits the P&L. A cash sale raises cash and raises revenue, and that revenue later increases equity through retained earnings.
A sale on credit raises accounts receivable instead of cash. The equity effect is the same once the sale is recorded.
Buying an oven with cash swaps one asset for another. Buying it with a loan raises equipment and raises a liability at the same time.
Paying a vendor bill lowers cash and lowers accounts payable. That payment is not profit or loss; it only changes the snapshot.
At month-end you still close the period so the income accounts dump into retained earnings. After that close, the Balance Sheet is ready to print.
Example
A neighborhood bakery starts Monday with $8,000 cash, $2,000 of flour, $3,000 owed to the mill, and $7,000 of equity. Assets of $10,000 equal liabilities of $3,000 plus equity of $7,000.
On Monday it sells $500 of bread for cash.
Bakery — Monday after the $500 cash sale
Assets
Cash 8,500
Flour 2,000
10,500
Liabilities
Mill bill 3,000
Equity 7,500
10,500
Same equation as the open. Cash and equity are each up $500. The mill bill is unchanged.
If the same $500 sale had gone on a cafe's tab, accounts receivable would rise rather than cash. The asset side would still grow, and equity would still rise by the profit.
Common mix-ups
A Balance Sheet is not a profit and loss statement. The P&L covers a stretch of time; this report is one date.
Cash on the Balance Sheet is not the same as profit. A bakery can be profitable and still short of cash if customers have not paid, or if it just bought an oven.
Assets are not leftover profit. Assets are what the business owns; equity is what is left after subtracting what it owes.
Related terms
- Assets: Everything the business owns or controls that carries future economic value.
- Liabilities: Everything the business owes to lenders, vendors, employees, and customers.
- Equity: The owners' residual claim on the business after liabilities are subtracted from assets.
- Current Assets: Assets expected to turn into cash or be used up within one year.
- Current Liabilities: Obligations due within the next twelve months.
- Retained Earnings: Cumulative profits kept in the business rather than paid out.
- Trial Balance: A listing of every ledger account balance, used to check that debits equal credits.
- Financial Statement Package: The bundled set of statements and schedules delivered after a close.