What is a Balance Sheet and What Does it Show?

The balance sheet is built on the accounting equation:

Assets = Liabilities + Equity

That equation must always balance. If a company takes out a loan, for example, cash (an asset) increases and debt (a liability)increases by the same amount.

What a balance sheet includes

Assets (what the business owns or controls)

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Assets are usually listed in order of liquidity (how quickly they can become cash).

• Current  assets: expected to be used, sold, or converted to cash within 12 months.
      Examples: cash at bank, trade receivables (customers who owe money), inventory/stock, prepayments.
• Non-current assets: used over a longer period.
      Examples: property, plant and equipment, vehicles, long-term investments, intangible assets such as software.

Liabilities (what the business owes)

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Liabilities are obligations to pay money or provide goods/services in the future.

• Current liabilities: due within 12 months.
      Examples: trade payables (suppliers), accrued expenses, taxes payable, short-term loans.
• Non-current liabilities: due after 12 months.
      Examples: long-term debt, lease liabilities.

Equity (owners’ interest)

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Equity represents the residual value in the business after liabilities are deducted from assets. It commonly includes:

• Share capital / owner contributions
• Retained earnings (profits kept in the business)
• Reserves (depending on structure and reporting)

Why the balance sheet matters

A balance sheet helps assess:

• Liquidity: Can the business pay upcoming bills?
• Solvency: Does the business have a sustainable level of debt?
• Working capital: Are short-term resources enough to run day-to-day operations?
• Financial structure: How much is funded by owners versus lenders?

It’s most useful when compared across periods (this month vs last month, this year vs last year) and reviewed alongside the profit and loss statement and cash flow statement. Profit shows performance over time; the balance sheet shows position at a moment; cash flow shows movement of cash.

What’s the difference between a balance sheet and a profit and loss statement?

A profit and loss statement shows income and expenses over a period and calculates profit. A balance sheet shows assets, liabilities, and equity at a single date.

Why does my balance sheet still balance if the business made a loss?

Losses reduce equity (often through retained earnings). The accounting equation still holds because equity is part of what makes the statement balance.

How often should a balance sheet be prepared?

Many businesses review it monthly for management purposes. At minimum, it’s prepared annually as part of year-end reporting.

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