Start with the date
A balance sheet is dated as of a specific day, such as the last day of a month. It does not cover a period. Two balance sheets a month apart show how the position changed, which is often more useful than either alone.
The layout is always the same. Assets sit at the top, liabilities and equity below, and the totals match. If the report you are looking at has a difference, something is wrong with the file or the report settings.
Assets: what the business holds
Assets split into current and long-term. Current assets are cash, bank balances, accounts receivable and inventory, things expected to turn into cash within about a year. Long-term assets include vehicles, equipment and sometimes deposits.
Look at accounts receivable closely. A large and growing balance can mean customers are paying slowly. Look at inventory too. Stock that does not sell is cash tied up on a shelf. For fixed assets, check that depreciation has been recorded, because equipment shown at full cost for years overstates what the business is worth.
Liabilities: what the business owes
Current liabilities include accounts payable, credit card balances, sales tax payable, payroll liabilities and the part of loans due within a year. Long-term liabilities are mostly loans that run beyond that.
Pay attention to tax and payroll liabilities. They should be small and cleared regularly. If a payroll tax liability keeps growing, taxes may not be getting paid, which is a serious issue to raise with your payroll provider or CPA right away. Also check that credit card balances match the statements.
Equity: what is left for the owner
Equity shows owner contributions, owner draws, retained earnings from past years and current year profit. For many small businesses, draws and contributions are the most revealing lines. Large draws compared with profit can leave the business short of cash.
If equity is negative, the business owes more than it owns. That can happen with young businesses or after heavy draws. It is not always a crisis but it limits borrowing and deserves a plan.
Quick checks that take five minutes
Compare the bank and credit card lines to actual statements. Look for accounts with odd names such as uncategorized or suspense that still hold balances. Check that the loan balance matches the lender's statement. Scan for any account that holds a balance on the wrong side.
Then compare to last month. Which accounts moved the most, and can you explain why? If you cannot explain a big change, ask your bookkeeper. A balance sheet that you can narrate is one you can trust.
When to bring in your CPA
Some items on a balance sheet need professional judgment, such as how to treat an old receivable that will never be paid, a loan from the owner, or a large asset purchase. Bring the report to your tax preparer at least once a year and ask what looks unusual. Fresh eyes catch things that daily familiarity hides.
Worked example with numbers
A balance sheet shows cash $14,000, receivables $6,000 and equipment net of depreciation $9,000, for total assets of $29,000. Liabilities are payables $4,500 and a loan $11,500, totaling $16,000. Equity is $13,000. Assets $29,000 equal liabilities plus equity, $16,000 + $13,000. Current ratio: current assets of $20,000 over current liabilities of $4,500 plus the current part of the loan is a quick way to judge whether you can pay bills.
Mistakes that cost money
Reading only the cash line. Ignoring negative equity. Confusing owner draws with expenses. Looking at one date without comparing to last year.
Check your work
Compare this month's balance sheet to last month's and explain every line that moved by more than a few hundred dollars.
Common questions
How often should I look at my balance sheet?
Monthly is a good habit, after the books are reconciled. Looking at an unreconciled balance sheet can mislead you.
Why is my balance sheet different from my bank balance?
The bank line should match the bank after reconciliation, allowing for outstanding checks and deposits. If it does not, an entry is missing or duplicated.
Is equity the same as the value of my business?
No. Equity is an accounting figure based on recorded costs. What a buyer would pay depends on earnings, assets and the market. A professional valuation is a separate exercise.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.
