Balance sheets are the financial heart of your business. They keep you informed about the value of your company by tracking what it owes and what it owns, along with how much money has been invested by shareholders. A balance sheet is one of three integral pieces to your financial reporting system. The other two are an income statement and a cash flow statement.

Using these tools not only helps gauge the progress and growth of your company but also allows you to compare your company’s numbers to others in the same industry. This type of insight is useful whether your company is new or established. It allows you to see whether costs and revenue are in line with similar goods and services. It can also help revise and update your business plans as you grow.

Since financial reports are so important to the success of a growing business, let’s look deeper into exactly what is on the balance sheet, learn how to read it, and begin putting it to good use.

• Why is a balance sheet important?
• What’s on a balance sheet?
• How to read the balance sheet
• How to use the balance sheet
• How to create a balance sheet
• Financial tools for your business success
• FAQs

Why is a balance sheet important?

Balance sheets are used by companies large and small to gauge financial health and viability. While generally updated quarterly, they can be used as a financial snapshot at any given time.

The balance sheet summarizes the company’s assets, liabilities, and owner’s equity, and is beneficial in several ways:

• Helps determine your working capital.
• Understand how many days of expenses you can cover.
• Compare year-over-year (YoY) expenses and revenue.
• Determine the company’s net worth.
• Apply for credit.

Each of these circumstances makes it easier to identify challenges and opportunities and take steps to continue scaling at the pace you desire. 

What’s on a balance sheet?

You’ll find three primary things on a balance sheet: assets, liabilities, and owner’s equity. Typically, you’ll want more assets than liabilities because this indicates your company is in a strong financial position. If the liabilities are greater than the assets, the value of your company is lowered and it could indicate a weak financial position.

Let’s look closer at what constitutes each of these items.

Assets

Everything of value held by your company — including cash, tangible property, and intangible property — is an asset. Depending on the design you choose for your balance sheet, you’ll likely have assets divided into at least a few separate categories.

Common ones include:

• Liquid or non-liquid. Liquid, or current, assets are items that can be converted to cash within a year or less. These include inventory and raw materials. Non-liquid, or fixed, assets take longer to convert to cash and may cause your company to lose value when doing so. Examples of these include real estate and specialty equipment.
• Tangible or intangible. Tangible assets are physical things the company owns. Land, buildings, and inventory are common examples of tangible assets. Intangible assets are intellectual property such as the company domain name, patents, and trademarks.
• Operating or non-operating. Assets that are necessary for day-to-day business operations — such as office computers — are categorized as operating assets. Non-operating assets — unused land, for instance — aren’t essential for daily operations, but they still hold value for the company.

Examples of assets include:

• Petty cash
• Bank accounts
• Stocks, bonds, or other securities
• Accounts receivable (A/R)
• Inventory
• Raw materials
• Works in progress

While this list isn’t exhaustive, it can give you a good idea of the different types of assets your company likely has.

Liabilities

Liabilities are generally debts a company owes, but they can be other obligations that reduce the company’s net worth. Liabilities are classified as either current or non-current.

Current liabilities are debts that can be paid within a year. They’re short-term obligations, such as:

• Accounts payable (A/P): This is money your company owes for goods or services that has not yet been paid.
• Accrued expenses: These are items you’re not invoiced for, such as employee wages and taxes.
• Short-term borrowing: This includes lines of credit at the bank or company credit cards.
• Unearned revenue: When a customer pays in advance — such as when you sell a gift card — but you’ve not yet delivered the products or services, it’s a short-term liability.

Longer-term liabilities are referred to as fixed liabilities, or non-current liabilities. This category includes things that can’t usually be paid off within a year.

Examples include:

• Deferred taxes
• Pension benefits
• Mortgages for company facilities
• Loans for vehicles or company equipment
• Bonds issued to raise capital

As with assets, there may be other items you’ll include in the liabilities section of your balance sheet, but this gives you a good overview of what to include.

Owner's equity

The third primary section of your company’s balance sheet tells you the value of what you, the owner, hold. Simply subtract the liabilities from the assets to determine your current equity.

Most balance sheets break this down into three sections:

• Initial capital: What the owner added to the business in the beginning
• Added capital: Any additional funds added by the owner over time
• Retained revenue: Profits that were kept in the company instead of being paid to the owner

When your assets exceed the value of your liabilities, you have positive equity in your company.

• If the opposite is the case, you have negative equity and your company may be struggling.

How to read the balance sheet

Reading the balance sheet is just a matter of calculating the financial strength of your company using the balance sheet formula.

This formula is essentially the same as figuring out the owner’s equity, but it may be written in two ways:

Assets = Liabilities + Owner's Equity

or

Owner's Equity = Assets – Liabilities

Using this formula will give you an accurate snapshot of your company’s financial health.

How to use the balance sheet

The insight you gain from having an accurate and up to date balance sheet benefits you in a variety of ways. Since it gives you a clear view of what your business owns and owes, it can help you make informed decisions as your company grows.

• Strategically utilize your balance sheet to determine whether the cash you have on hand will meet immediate needs.
• Use it to compare one period against another, such as YoY revenue and expenses, to see improvements or stagnation.
• If you’re considering a sale, you can use the balance sheet to calculate the company’s net worth — and you’ll have concrete proof of those claims to show potential buyers.
• Likewise, if you’d like to apply for credit with your financial institution, having all the financial details available on the balance sheet can help you get approved.
• When filing federal or provincial taxes, you may be required to submit your balance sheet to support revenue and expense claims.

How to create a balance sheet

You can create a balance sheet manually using standard spreadsheet software. The most basic sheet will list assets on the left side and liabilities on the right. The item in question may be written in the middle of the sheet.

Let’s say you own an ice cream shop. The current asset list might look like this:

• $2,000 cash in the bank
• $500 in accounts receivable
• $3,000 worth of inventory

Plus fixed assets such as:

• $500 for tables and chairs
• $7,000 for freezers
• $1,000 for your computers and point-of-sale equipment

In total, your ice cream shop has $14,000 in assets:

($2,000 + $500 + $3,000) + ($500 + $7,000 + $1,000) = $14,000

On the right side, you’ll list the liabilities. If you're noting the items in the centre, it may look a bit like this:

• Accounts payable $1,000
• Sales tax $500
• Salary and wages owed $1,500

Long-term liabilities might include an outstanding business loan of $4,000 you used for startup.

The numbers on the liabilities side of your balance sheet will look like this:

($1,000 + $500 + $1,500) + $4,000 = $7,000

When you subtract your liabilities from your assets ($14,000 – $7,000), the remaining $7,000 is your owner's equity.

If you’d rather not create your own balance sheet from scratch, try using a balance sheet template instead.

Keep in mind that your balance sheet is an ever-changing document. You may choose to fill it out once each year, or you might opt to update it as frequently as each month.

Whether you choose to start from scratch or use our template, be sure to customize it for your specific needs. Include the asset and liability categories that work best for your company.

The above balance sheet template will help guide you through the process. You can change the account titles and the amounts listed in the spreadsheet to fit your needs. You can also add rows when you need to add new accounts and balances. The total amounts will automatically populate based on the embedded formulas.

Financial tools for your business success

In addition to the balance sheet, there are two additional tools that help establish a financially healthy company.

• Income statements. The income statement reports revenue, expenses, and net income for a specific period of time. The net income balance in the income statement increases an owner’s equity in the balance sheet.
• Cash flow statements. A cash flow statement lists the cash inflows and outflows for a calendar period, and the ending cash balance is the same dollar amount reported in the balance sheet. If you create a June cash flow statement, for example, the June 30 cash balance in the cash flow statement equals the cash balance in the June 30 balance sheet.

Creating and keeping your balance sheet and other financial statements up to date enables you to have a solid handle on your company’s finances.

Streamline your balance sheet

One of the best ways to make your business's financial statements and tools more streamlined and efficient is to use digital tools and solutions. Download our free balance sheet template to simplify updates, for instance. And if you're ready for more automation and direct integration, get easy financial tracking and reporting from QuickBooks to help your company manage debt, determine risks and returns, and secure loans and other capital.