Balance Sheet

Learn It

The Balance Sheet is a snapshot. It shows the business's financial position at one specific point in time— usually the last day of a month or year. It answers three questions:

• What does the business own? (Assets)
• What does the business owe? (Liabilities)
• What is the owner's share? (Equity)

This is different from the Profit & Loss Statement, which shows activity over a period of time. The P&L asks "What happened this month?" The Balance Sheet asks "Where do things stand right now?"

As we covered in the Accounting Equation lesson, the Balance Sheet is built on one rule that never changes:

If the Balance Sheet does not balance, something is wrong in the books.

Assets

Assets are what the business owns. They have value and are expected to benefit the business in the future. Common assets include:

• Cash: Money in checking and savings accounts. As we covered in Banking Transactions, the bank balance and the book balance should be reconciled regularly.
• Accounts Receivable: Money owed to the business by customers who have been invoiced but have not yet paid. See Accounts Receivable.
• Inventory: Products held for sale. See Inventory and COGS.
• Equipment and Fixed Assets: Long-term assets used to run the business. See Fixed Assets and Depreciation.
• Accumulated Depreciation: A contra-asset that reduces fixed assets. It appears in the asset section but is subtracted from the total.

Assets are often split into current assets (expected to be used or collected within a year — like cash and accounts receivable) and long-term assets (expected to last more than a year — like equipment).

Liabilities

Liabilities are what the business owes. They are obligations to pay money or deliver goods or services in the future. Common liabilities include:

• Accounts Payable: Money owed to vendors for bills that have been received but not yet paid. See Accounts Payable.
• Credit Card: The balance owed on a business credit card. See Credit Cards.
• Loan Payable: Money borrowed that must be repaid. See Loans and Debt.
• Sales Tax Payable: Sales tax collected from customers but not yet remitted to the tax agency. See Sales Tax.
• Payroll Liabilities: Employee withholdings and employer taxes owed to tax agencies. See Payroll Bookkeeping.
• Unearned Revenue: Cash received from customers before the work is completed. See Prepaids, Accruals, and Deferrals.

Like assets, liabilities are often split into current liabilities (due within a year) and long-term liabilities (due after a year).

Equity

Equity is the owner's share — what would remain if all assets were sold and all liabilities were paid off. As we covered in Owner Equity, equity includes:

• Owner Contributions: Money the owner has invested in the business.
• Retained Earnings: Cumulative profits kept in the business from prior periods.
• Current-Period Earnings: Net income from the current period. This is the link to the P&L — the profit shown on the P&L flows into equity here.
• Owner Draws: Money the owner has taken out. These reduce equity.

When the business earns a profit, equity increases. When the owner takes money out, equity decreases. When the business takes a loss, equity decreases.

Why the Balance Sheet Is Cumulative

The P&L resets to zero at the start of each new period. The Balance Sheet does not. It carries forward from one period to the next. The cash balance, the loan balance, the equipment balance — these all carry forward and change as new transactions are recorded.

This is why the Balance Sheet is called cumulative. It shows the running total of everything that has happened since the business began — not just what happened this month.

See It

Here is the Balance Sheet for Northstar Creative — the same business from the P&L lesson — as of the end of the month:

The Balance Sheet balances: Total Assets ($33,000) = Total Liabilities ($18,000) + Total Equity ($15,000). This is the accounting equation in action.

Notice that Current-Period Earnings ($5,000) is the net income from the P&L. This is how the two statements connect. The profit from the P&L flows into equity on the Balance Sheet.

How Bookkeepers Review a Balance Sheet

A bookkeeper looks for several things when reviewing a Balance Sheet:

• Does it balance? If Assets ≠ Liabilities + Equity, there is an error in the books.
• Negative balances: Cash should not be negative. Accumulated Depreciation should not be positive. Accounts Receivable should not be negative (that would mean the customer overpaid or has a credit).
• Old balances: Are there accounts that have not changed in a long time? A loan balance that never decreases may mean payments are not being recorded correctly.
• Negative equity: If total equity is negative, the business has accumulated losses. This is a warning sign.
• Unusual amounts: Does any account balance look too large or too small compared to what the business owner would expect?

The Balance Sheet and the P&L work together. If the P&L is wrong, the Balance Sheet will also be wrong — because net income flows into equity. A bookkeeper who understands both statements can spot problems that would be invisible from looking at just one.

Do It

Build a Balance Sheet from a list of accounts. Place each account as an Asset, Liability, or Equity. Leave income-statement accounts unplaced. Then type the totals and confirm the statement balances.

Prove It

Answer each question, then read the explanation. There's no score — this is just to help the ideas stick.

Ready for more than a short exercise?

Building one clean Balance Sheet from a short list is different from reviewing a Balance Sheet produced by a complete set of books and deciding whether the balances make sense. QBO Dojo practice clients let you work with realistic financial statements inside QuickBooks Online and spot issues across many accounts at once.

Key Takeaways