Balance sheet: reading the one statement that shows what you own and owe

A balance sheet lists what a business owns, what it owes, and the difference between the two, at one specific date. That last part matters: unlike a profit and loss account, which covers a period, a balance sheet is a snapshot. It shows the position on 31 December, not what happened during the year.

It is the statement small business owners read least and probably need most. Profit tells you whether the trading worked; the balance sheet tells you whether the business can pay its bills next month, how much of it is funded by other people, and whether money is trapped in stock and unpaid invoices.

What is on it

• Assets — what you own. Split into current assets, expected to turn into cash within a year (bank, receivables, stock, prepayments), and non-current assets held longer (equipment, vehicles, property, intangibles).
• Liabilities — what you owe. Current liabilities are due within a year (suppliers, tax, short-term borrowing, accruals); non-current liabilities are longer-term loans.
• Equity — what is left for the owners: capital introduced, plus accumulated profits retained in the business, less what has been taken out.
• The identity that gives it the name: assets equal liabilities plus equity, always. If it does not balance, something is wrong with the bookkeeping rather than with the business.
• Comparatives — the same date a year earlier — without which a single column tells you very little.
• Notes, where the interesting detail usually lives: what the receivables consist of, what the loan terms are, what has been pledged as security.

Read the movement, not the level. A receivables figure of 60,000 means nothing on its own; the same figure having doubled while revenue was flat is a collections problem you can act on. This is why comparatives matter more than the current column, and why a balance sheet reviewed monthly is worth several times one produced annually for the tax return.

The handful of things worth checking

1. Compare current assets with current liabilities. If what is due within a year exceeds what will become cash within a year, that gap is your next problem regardless of profitability.
2. Look at cash separately from receivables. Money owed to you is not money, and the balance sheet is where the difference becomes visible.
3. Check receivables against revenue. Growing faster than sales means collections are slipping.
4. Check stock, if you hold any, the same way. Stock growing faster than sales is cash converted into things nobody has bought yet.
5. Look at payables. Growing quickly can mean sensible use of terms — or that you have started paying late, which is a different story.
6. Note how much is borrowed and when it is repayable. A large non-current loan due to become current next year deserves planning now.
7. Check that equity moves by the profit you made less any drawings. If it does not, something is misposted.
8. Explain every balance you cannot account for in a sentence — that exercise finds more errors than any other review.

Profitable and insolvent are compatible

The reason to read the balance sheet is that profit and solvency are different things. A business can be profitable on paper and unable to pay its suppliers, because the profit is sitting in unpaid invoices and stock while the liabilities are due in cash this month. That combination is one of the most common ways small companies fail, and the profit and loss account gives no warning of it at all. The balance sheet does, a month or two in advance, if anyone is looking.

Ettex Books produces the statement from the underlying records: a chart of accounts structured the way accountants expect, double-entry journal entries with full debit and credit control, categories and auto-categorisation rules, bank statement import from CSV or OFX with reconciliation so the cash line is genuinely reconciled, multi-currency with rate tracking, attachments on any entry so a balance can be traced to its evidence, instant search across all periods, and P&L, balance sheet and ledger export as PDF, CSV or XLS to hand your accountant. The comparison over time and any ratio you want to track fit Ettex Sheets, receivables detail comes from Ettex Invoices, and the commentary belongs in Ettex Docs.

Said plainly: this is not accounting advice, and Ettex is not an accountant. There is no statutory accounts preparation, no filing to any registry or tax authority, no audit trail certified against a standard, no consolidation across entities and no automatic application of local accounting rules. Books keeps the ledger and exports the statement; how items must be classified, valued and disclosed under the rules where you operate is a question for a qualified accountant.

Common misreadings

• Reading one column with no comparative, which conveys almost nothing.
• Treating receivables as cash.
• Ignoring the current-versus-non-current split, which is where liquidity lives.
• Assuming a balanced balance sheet means correct bookkeeping — it balances by construction, errors and all.
• Never explaining individual balances, so stale amounts accumulate for years.
• Looking at it annually, at which point every warning it contained is historical.
• Confusing equity with cash available to withdraw.
• Forgetting that valuations follow accounting rules, not market prices.

A balance sheet answers questions profit cannot: can we pay what is due, who funds us, and where is the cash trapped. Read it monthly, always against a comparative, and be able to explain every line.