Understanding What Your Balance Sheet Means for Your Business

what is a balance sheet - why its important for your small business

Within the first year of starting or purchasing a business, most entrepreneurs realize they need to be producing financial statements. Shortly thereafter, they learn that producing a financial report and understanding what it means are separate challenges. In this article, we explain how to read and create a balance sheet. 

What is the balance sheet and why it is important?

A standard financial package for businesses includes an income statement, balance sheet, and a statement of cash flows. As a contributor to the overall financial health of the company, the balance sheet often becomes the focus of business decisions. In a simple, consolidated format, the balance sheet shows how much a business is worth. Balance sheets can be generated manually by an internal accountant, remote bookkeeper, or business owner, although many companies choose to use an accounting software program or small business accounting service

A balance sheet can be used to quickly assess net worth because it clearly lists assets, or what a business owns, and liabilities, or what a business owes. By keeping an organized running total of the two, companies can evaluate their business’s financial position, equity, growth, and stability on a regular basis. The statement helps founders, CEOs, and third-party users make more-informed business decisions. Third-party users of the balance sheet may be small business lenders that are calculating the debt-to-asset ratio before approving financing or a potential investor verifying the financial value the business. 

What’s on the balance sheet?

Balance sheets are unique because they do not list granular detail, but look at the overall financial position of the entity. The balance sheet has three major components: assets, liabilities, and equity. 


Assets listed on the balance sheet represent everything the business owns as of a certain date. Assets are categorized as current, or short-term, assets and fixed, or long-term, assets. How an asset is categorized is determined by the liquidity of the asset. Current assets are those that can be liquidated, or converted to cash, within 12 months of the balance sheet. Long-term assets are those that cannot be converted as quickly. Some examples of assets include:

Current Assets:

  • Cash (balance of reconciled business bank account)
  • Accounts receivable (money owed to the business for services provided)
  • Inventory

Long-term assets:

  • Commercial real estate
  • Equipment 
  • Deferred income taxes
  • Goodwill (an example of an intangible long-term asset)


On the balance sheet, liabilities follow the asset listing. Liabilities are accounts that represent money the organization owes to other individuals, companies, or financial institutions. Current liabilities are monies owed that will be paid in the current year, while long-term liabilities will remain on the balance sheet in 12 months. Some liabilities, like debt financing, may be split between current and long-term assets. This is because the portion of the loan that will need to be repaid over the next year is considered “current” and the remainder is the long-term liability.  Some examples of liabilities include:


  • Accounts payable
  • Accrued expenses (operating expenses, like utility costs, where the money is owed, but has not been invoiced or paid yet)
  • Salaries and wages payable (money owed to employees for time already worked)


  • Mortgages payable
  • Deferred income taxes


Equity tells what a business is worth. In other words, it is the value of the company’s assets once all of the liabilities are deducted. Often called, shareholder equity, this balance indicates the value of each business owner’s investment and what returns they can expect to see. 

Bottom Line

At The Edge Capital, we know that the key to growth and profit lies in the content of the income statement, balance sheet, and the statement of cash flows. That’s why we dedicate a significant portion of our resources to working with companies like yours to provide accounting services for financial statement preparation, budgeting and cash forecasting, payroll, virtual bookkeeping, and financial consulting. Schedule a discovery call today to learn more about what we can do to help you take business to the next level.