How to read and prepare a balance sheet

A balance sheet gives you a snapshot of your company’s financial standing on a given day. It shows what you own, what you owe, and your stake in the business. The balance sheet won’t tell you which invoices are overdue, but it will reveal when receivables are piling up. That’s often an early sign of pressure on cash flow. 

According to recent QuickBooks research, companies were owed an average of $17,500 in late payments, and nearly half had bills more than 30 days overdue. If you notice receivables rising on your balance sheet, you can take action before it affects cash flow, such as chasing up overdue payments.

You can start by preparing a balance sheet in Excel, but it’s important to understand where excel vs accounting software differ: accounting software automates many of the checks and balances (like ensuring assets always equal liabilities plus equity), reducing risk of manual errors. As businesses grow, the efficiency and automation offered by accounting software often outpace what’s feasible in pure Excel.

Accounting software automatically updates your balance sheet, enabling you to track your financial performance in real time. In this article, you’ll learn how to read a balance sheet and prepare one for your business.

What is a balance sheet?

How to read a company balance sheet and prepare one

Balance sheet example

Balance sheet uses

How to prepare a balance sheet in QuickBooks Online

Spend more time but less effort growing your business

What is a balance sheet?

A balance sheet is a financial statement that lists a company’s assets, liabilities, and equity. The purpose of a balance sheet is to provide a summary of the entity’s financial position at a specific point in time. As such, the balance sheet may also be referred to as the statement of financial position.

The balance sheet, income statement, and cash flow statement are the three main financial statements that businesses use. Companies are legally required to generate these financial statements.

In both bookkeeping and accounting, you prepare your balance sheet at the end of the accounting cycle. The closing figures from one balance sheet become the opening balance figures for the next period.

Balance sheets may be produced monthly, quarterly, or annually, depending on your needs. They are valuable business tools that can help you make financial decisions, so it’s beneficial to refer to them throughout the year.

How to read a company balance sheet and prepare one

Reading a balance sheet isn’t easy. That’s why there’s no book called “How to Read a Balance Sheet for Dummies.” 

Your balance sheet is based on the fundamental accounting equation:

• Assets = Liabilities + Equity

This equation keeps everything in check. If your assets equal your liabilities plus equity, then everything’s “in balance.” If the numbers don’t match, something may be missing or recorded incorrectly.

Here's a step-by-step guide to reading your balance sheet:

Step 1: Analyze assets

Assets are resources owned by the business that can be used to produce economic value. Common business assets include cash, inventory, and equipment.

Assets are listed in order of liquidity, which means how quickly they can be converted into cash. Liquid assets, such as accounts receivable (unpaid invoices sent to customers) or inventory, can be turned into cash quickly. Equipment and buildings that take longer to sell or convert are considered illiquid.

There are two main types of assets:

• Current assets: These are assets you expect your business to use, sell, or convert to cash within a year, such as inventory.
• Non-current assets: These assets have longer-term value to your business and are harder to convert into cash. Examples include office furniture, buildings, or long-term investments.

Say you run a small gardening business. Your current assets include $3,000 in your business bank account, $500 in unpaid invoices, and $1,200 worth of lawn care supplies. Your non-current assets might consist of a $4,500 van and $1,000 worth of power tools.

Step 2: Calculate liabilities 

Liabilities are what your business owes. Common examples of business liabilities include loans and wages. Liabilities are divided into several categories.

Categorizing your company’s liabilities is simpler than classifying assets because liabilities are generally described as either current or non-current:

• Current liabilities are short-term debts, typically payable within a year. Examples include rent, utilities, employee wages, and other accounts payable.
• Non-current liabilities are long-term debts—those that cannot be paid off within a year. Examples include deferred tax liabilities, bonds payable, and pension benefits owed to employees. Non-current liabilities are often referred to as long-term liabilities.

It’s important to understand current vs. non-current liabilities because they affect your business differently and are listed separately on the balance sheet.

Let’s go back to our gardening business example. Your current liabilities might include $600 owed to your supplier for lawn products and $800 in wages for your part-time staff. If you bought your $2,500 van with a three-year loan, the amount you’ll pay over the next 12 months is a current liability, and the remaining balance is a non-current liability.

Step 3: Calculate equity

Equity is the value of the owners’ interest in the business after all assets are liquidated and all liabilities are paid. To calculate equity, subtract liabilities from assets—hence the term net assets. It is also known as owners’ equity, shareholders’ equity, or stockholders’ equity.

Need help keeping track of assets, liabilities, and equity? Intuit Assist can take the pressure off and give you more time to run your business.

Balance sheet example

Here’s what a balance sheet looks like. In the left column, you see the company’s assets: current and fixed below that are the liabilities and shareholders’ equity. 

In the other columns, you can see this year’s figures and last year’s figures. Placing them side by side helps you understand how the business is changing over time and makes trends easier to spot.

Looking at this example, the good news is that although cash and cash equivalents have remained the same, total assets have increased. Liabilities jumped to $40,000, and equity fell to $48,000. 

Sales have grown, but too much cash is tied up in unpaid invoices and stock, forcing the company to borrow to fill the gap.

An accountant may advise this business owner to reduce stock levels, chase unpaid invoices more aggressively, and explore cheaper borrowing options.

Balance sheet uses 

The balance sheet provides a clear view of what your business owes and owns. The insights you can gain from the balance sheet—along with other financial statements—allow you to make informed financial decisions as your business grows.

You can use a balance sheet to:

Define your working capital

A primary use of the balance sheet is to evaluate your company's liquidity. By comparing current assets (like cash and accounts receivable) to current liabilities (like accounts payable and short-term debt), you can determine if you have enough readily available resources to cover your immediate obligations. 

Compare data

Using the balance sheet to look at data across different time periods helps you identify crucial financial trends. For example, you can track whether your total assets are growing, whether your debt load (liabilities) is increasing disproportionately, or whether the mix between equity and debt is shifting. 

This historical analysis supports strategic planning and identifies operational areas that require adjustments.

Assess Your business’s net worth

The balance sheet provides the data needed to calculate your business's net worth, also known as owner's equity or shareholders' equity. Knowing your net worth is vital for business owners, especially when planning a sale, as it represents the residual interest in the assets after liabilities are deducted.

Apply for credit

When seeking financing, such as a small business loan, a lender will critically review your balance sheet. 

Imagine you run a bakery and want a small business loan to buy a second oven. The lender asks to see your balance sheet. It shows your assets exceed your liabilities, indicating you’re in a healthy position to repay the loan. Your balance sheet could be what tips the lender’s decision in your favor.

Meet tax and reporting requirements

For regulatory compliance and tax purposes, many businesses are legally required to prepare and submit a balance sheet along with other financial statements (like the Income Statement and Cash Flow Statement). These documents provide the transparency government agencies and regulators need to ensure adherence to financial standards and accurate tax calculations.

How to prepare a balance sheet in QuickBooks Online

QuickBooks Online automatically calculates your assets, liabilities, and equity, updating them every time you record a transaction. All you need to do is make sure the data you enter is accurate.

Here’s how to use QuickBooks Online to create your balance sheet:

1. Verify the accuracy of your data

Before you generate the report, check that your data is correct. This starts with two key reports inside QuickBooks Online:

• Chart of accounts: When you buy new inventory, you record it in your inventory account. Your chart of accounts is the list of accounts you use to categorize your transactions. Review your transactions and ensure each is assigned to the correct account. While you’re there, verify that incoming payments match the right customer and account.
• Bank reconciliation: Make sure your business bank and credit card accounts are fully reconciled up to the report date. This involves matching each transaction in QuickBooks to your actual bank statements. It’s the best way to confirm that your cash, card, and loan balances are correct before generating the report.

The accuracy of your balance sheet depends entirely on the accuracy of the data behind it, so you must do these checks first.

2. Generate the report 

Once your books are tidy, generating your balance sheet in QuickBooks Online takes just a few clicks.

• Go to the Reports menu.
• In the search bar or list, select Balance Sheet.
• Choose the correct “as of” date—this is the point in time the report reflects (e.g., December 31).

When the report opens, you will want to:

• Verify the balance: At the bottom of the report, make sure Total Assets = Total Liabilities + Equity. If they don’t match, something might be miscategorized or missing.
• Check your working capital: Subtract current liabilities from current assets. This shows whether you have enough short-term assets (like cash or receivables) to cover short-term debts.

3. Analyze trends

Once your report looks accurate, start looking for patterns. In QuickBooks Online, you can compare the current report to previous periods. Many businesses review monthly, quarterly, or annual comparisons to see how their finances have changed over time.

You might notice your debt has risen or your earnings have dropped. Investigate possible reasons, such as overspending, pricing that’s too high, or reinvestment in the business.

Imagine you run a dog grooming business. You pull a balance sheet every month and notice your cash on hand has grown from $2,000 in April to $6,500 in August. That’s a strong sign your business is healthy and may soon have the cash to invest in new equipment or staff.

Spend more time but less effort growing your business

Once you understand the labels and numbers on a balance sheet, you can see how your business is performing. The more accurate your data is, the more informed your decision-making will be. If you notice there’s not as much cash in the bank as you thought, then you can fix the problem before it gets worse.

Get started with QuickBooks bookkeeping software to spend less time on bookkeeping and more time growing your business. You can also use AI accounting tools to keep your balance sheet more up to date.

*QuickBooks Live Bookkeeping requires QuickBooks Online subscription. Additional terms, conditions, limitations, and fees apply.