A balance sheet lists what your business owns, what it owes and what is left for you, as of one date, usually a month end. How to read a balance sheet for beginners starts with its shape: assets on top, liabilities and equity below, and the two totals always match, because everything the business holds was paid for with someone else's money or with yours. The P&L says whether you made money over a period. The balance sheet says whether you can pay what is due, how much of the business the bank owns, and whether the profit stayed in the company or went out the door.
The three blocks
A balance sheet is a statement of assets, liabilities and equity at a single date. The SEC's long-standing beginners' guide to financial statements gives the rule that holds it together: assets equal liabilities plus shareholders' equity. That is the definition, not a coincidence. Whatever the business owns was financed by a creditor or by an owner.
Assets are what the business owns or is owed. Current assets are cash and anything that turns into cash within a year: bank balances, accounts receivable, inventory, prepaid insurance. Fixed assets are the trucks, equipment and buildings, at cost less the depreciation taken so far, which is why a truck you could sell for $40,000 might show at $11,200.
Liabilities are what the business owes. Current liabilities are due within a year: accounts payable, credit card balances, the line of credit, payroll and sales tax collected but not yet sent, and the next twelve months of loan principal. Long-term debt is the rest of the loan and anything else due later.
Equity is what is left when you subtract liabilities from assets. In QuickBooks Online it shows as a few lines: the money you put in, retained earnings, the current year's net income, and owner draws or distributions as a negative figure. Retained earnings is every year's profit since the business started, less every dollar taken out, rolled forward. This block answers a question the P&L never asks, which is whether the profit stayed.
Running it in QuickBooks Online
In QuickBooks Online the report is called Balance Sheet, under Reports, and the date at the top is the only date it describes. Set it to the last day of the month your bookkeeper has closed, not today, because today's version includes whatever has not been categorized yet. The cash and accrual toggle changes the numbers more than owners expect. On cash basis the receivables and payables lines are zero or close to it, and the picture looks simpler than it is. On accrual you see what customers owe you and what you owe suppliers. If the two versions look very different, which basis you are looking at is the first thing to settle. Add a comparison column for the same date last year. One balance sheet is a photograph; two side by side are a story.
Most owners read it alone. A March 2025 TD Bank survey of 250 owners found 66 percent were the sole person responsible for the business's financial preparedness, and in a June 2024 Xero survey of 1,021 small businesses, half said weak financial literacy had already cost them something.
The five balance sheet lines beginners should read every month
Cash is the first line and the one everyone reads. Read it as days, cash divided by an average day's outgoings. A 2016 JPMorgan Chase Institute study of 597,000 firms found the median small business held 27 days of cash. A 40-person company spending $9,300 a day with $61,400 in the bank has under seven days, which the dollar figure hides and the days figure does not.
Accounts receivable is the second line. If it grows faster than sales, customers are paying you more slowly, and the profit on the P&L is sitting in their bank accounts rather than yours. Accounts payable is the mirror: if it grows faster than costs, you are paying suppliers more slowly, which is fine until it is not.
Credit cards and the line of credit are the fourth line, and the one that says whether the business is funding itself. A line balance that never returns to zero is a term loan with a worse rate. The fifth line is draws or distributions, the one most owners skip because it is about them. Compare it with net income for the same period. When draws exceed profit, equity falls, and the business is shrinking whatever the P&L says.
Four numbers you can compute in a minute
Working capital is current assets minus current liabilities, the cash the business would have if it collected everything due and paid everything owed within the year. Current ratio is current assets divided by current liabilities. Debt-to-equity is total liabilities divided by equity. Equity-to-assets is equity divided by total assets, the share of the business that you own rather than the bank.
Ambrook, which makes accounting software for farms, walks through a farm balance sheet with $1,126,535 of assets, $455,125 of liabilities and $671,410 of equity, and gives the ranges an ag lender uses: a current ratio above 2 is strong, debt-to-equity under 1 is comfortable, and equity-to-assets above 70 percent is strong while below 40 percent is weak. That farm has working capital of $43,760 and equity of about 60 percent of assets.
| Number | Formula | Ambrook's lender range | A 30-person service business |
|---|---|---|---|
| Working capital | Current assets minus current liabilities | Positive and growing | About one payroll or more |
| Current ratio | Current assets divided by current liabilities | Above 2 strong | 1.2 to 1.5 is workable |
| Debt-to-equity | Total liabilities divided by equity | Under 1 comfortable | Under 1.5 if the debt is equipment that earns |
| Equity-to-assets | Equity divided by total assets | Above 70% strong, below 40% weak | Above 40% and rising |
The right-hand column is where we part company with the standard ranges, which were written for businesses with land and inventory. A service business with 30 staff, no inventory and receivables that turn in 40 days can run a current ratio of 1.3 and be safe, because its current assets are mostly cash and invoices about to be paid. What it cannot do is run below 1 for long.
Lines that should not be there
A balance sheet also tells you how good the bookkeeping is. Undeposited Funds with a balance older than a week means payments were received and never matched to a deposit. Negative accounts receivable means a payment was recorded without an invoice, or an invoice was deleted after it was paid. Opening Balance Equity should be zero. A balance there on any file more than a month old is setup residue nobody cleared. Ask My Accountant is a holding account for transactions the bookkeeper could not place, and anything in it at month end is a question that was never asked. A Due to Owner line nobody can explain is usually personal expenses on the company card. The five-minute check of your bookkeeper's file starts with these lines.
What the balance sheet says that the P&L hides
The situation we see most is a good year with equity down. Net income was $148,000, the owner took $191,000 in draws for taxes and living, and equity fell by $43,000. The P&L looks like a success, and it was, but the business is smaller than it was in January. The second is receivables growing behind a profitable P&L: sales up 20 percent, receivables up 45 percent, bank balance flat. Both are the gap between profit and cash, and the balance sheet shows them before the bank does, which is the reason to read it alongside the P&L rather than after it, since each explains the other.
It has limits. It shows receivables at face value, not at what will be collected, and a truck at cost less depreciation, not at what it would fetch. It is silent about anything that happened the day after its date.
When you own more than one company
Three QuickBooks files, one landscaping business: an operating company, an equipment company that owns the trucks and leases them back, and a holding company with the line of credit. Cash across the three files is $61,400. The operating company shows $212,000 due to the other two; they show $212,000 due from it. Add the three balance sheets and you get $212,000 of assets and $212,000 of liabilities that are not real. Cancel them and the picture is $61,400 of cash, a line of credit that sits in the holding company but funds the operating company's payroll, and a fleet owned by an entity with no revenue. The question a lender will ask is which company is actually carrying the debt, and the answer is not the one whose name is on the loan. Intercompany balances are where that answer lives.
Navigator reads each QuickBooks Online file read-only and shows cash, receivables and payables per entity and combined each morning, so the five lines above are current on a Tuesday rather than at close. The base plan does that much. Canceling the intercompany balances so the combined balance sheet is real is part of the Pro plan. It changes nothing in the files.
A lender reads the balance sheet before the P&L, for the current ratio and the debt, then goes looking for coverage. Read it in the same order, once a month.
Questions owners ask
What does a balance sheet tell you about a business?
Whether it can pay what is due in the next year, how much of it is financed by lenders rather than by the owner, and whether the profit it has made over the years is still in the business or has been taken out. It also shows the quality of the bookkeeping, because unexplained balances and suspense accounts all land here.
What is the difference between a balance sheet and a profit and loss statement?
The P&L covers a period, a month or a year, and says what you earned and spent in it. The balance sheet is a snapshot at one date and says what you own, owe and have left. Net income from the P&L flows into the equity section of the balance sheet, so a year of profit should show up as higher equity unless it was taken out.
What is a good current ratio for a small business?
Lender guides, including Ambrook's for farms, call anything above 2 strong. That range assumes inventory and land. A service business with no inventory and receivables that turn in 40 days can run at 1.2 to 1.5 safely, because its current assets are mostly cash and invoices about to be paid. Below 1 for more than a month or two is the number to worry about.
Why does my balance sheet show negative equity?
Usually because draws or distributions over the years have exceeded the profit the business made, or because a losing period was funded with debt or the owner's credit card. Sometimes it is a bookkeeping artifact, such as a loan recorded as income or assets never entered. Ask which before you ask what to do about it; the fix is different in each case.
How do I run a balance sheet in QuickBooks Online?
Go to Reports, search for Balance Sheet, set the date to the last day of the month the bookkeeper has closed, and choose cash or accrual at the top. Add a comparison column for the same date last month or last year. The report is only as good as the reconciliation behind it, so check that every bank and card account has been reconciled to that date first.
Related
The draws line is where most surprises live, and owner draw vs salary vs distribution explains why the same take-home can look so different on two balance sheets. The four numbers above belong on a monthly sheet with a handful of others, which financial KPIs for small business owners lays out. If the report you are reading might be on the wrong basis, cash vs accrual in QuickBooks settles it.
If you are not sure the balances on your own balance sheet can be trusted yet, the free accounting health check reads the file and tells you: navigatorhq.ai/health-check.
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Published . Last updated . Reviewed by a CFO on the Navigator team.