The balance sheet is one of the three core financial statements, and it answers a simple question: what does the business own, and what does it owe? Read alongside your profit and loss statement, it shows the financial health and stability of your business. Here is how to understand it.
What is a balance sheet?
A balance sheet is a snapshot of your business's finances at a single point in time. It lists what you own (assets), what you owe (liabilities), and what is left over for the owners (equity). Unlike a profit and loss statement, which covers a period, the balance sheet is a moment.
The accounting equation
Everything on a balance sheet follows one rule, which is why it always "balances":
The three parts
| Section | What it is | Examples |
|---|---|---|
| Assets | What the business owns | Cash, inventory, equipment, money owed to you |
| Liabilities | What the business owes | Supplier bills, loans, tax owed |
| Equity | The owners' stake | Capital invested, retained profit |
How to read a balance sheet
Look at whether assets comfortably cover liabilities — that is a sign of stability. Check that you have enough current assets (cash, receivables, stock) to meet short-term liabilities. Rising equity over time means the business is building value. Compare balance sheets across dates to see the direction of travel.
Balance sheet vs profit and loss
The two work together: the P&L shows whether you made a profit over a period; the balance sheet shows what that leaves you owning and owing at a point in time. Profit from the P&L flows into equity on the balance sheet. You need both for the full picture.
Get your balance sheet automatically
RushFlow's accounting builds your balance sheet from your day-to-day transactions, so an accurate, up-to-date view of what you own and owe is always available.