What is a balance sheet for business?

A balance sheet is a key financial statement that helps you understand your business’s current financial standing and where to make improvements. It may also be required by lenders and investors when they assess your financial health.

If you haven’t used a balance sheet before—or need a quick refresher—this article explains what it is, what it includes and how to read and create one.

What you’ll learn:

• A balance sheet is a statement of a business’s assets, liabilities and owner’s or shareholders’ equity as of any given date.

• On a balance sheet, a company’s liabilities plus equity should always equal the company’s assets.

• Balance sheets can be used to gauge a company’s financial position and may be requested by lenders, investors or potential buyers.

A balance sheet is a financial statement that shows a business’s assets, liabilities and equity—what it owns and owes—at a specific point in time. Comparing balance sheets over time allows small-business owners (SBOs), investors and lenders to monitor a business’s net worth, financial health and liquidity.

The balance sheet is one of three financial statements used to provide insight into a business’s financial position, alongside the income statement and cash flow statement.

A balance sheet shows a business’s assets (what it owns), liabilities (what it owes) and equity (the owner’s or shareholders’ stake), using this formula:

Assets = Liabilities + Equity

The equation shows that a business’s assets should equal its total liabilities plus shareholders’ or owner’s equity. If they don’t, there may be mistakes in—or data missing from—the balance sheet.

Balance sheets also break down each category into components, like current and noncurrent (short-term and long-term) assets and liabilities. Equity may include retained earnings and owner or shareholder contributions.

SBOs or their accounting teams prepare balance sheets at regular intervals, such as quarterly or annually, and include three main components:

Your business assets are items of value that your company owns or is owed. They may include:

• Cash or cash equivalents

• Investments

• Product inventory

• Owned equipment

• Prepaid expenses

• Accounts receivable (or money that’s owed to your business) 

• Owned property, such as real estate or company vehicles

Your business liabilities are debts, or amounts your business owes to others. They may include items such as:

• Loans

• Credit card debt

• Wages payable to staff

• Deferred tax liability

Accounts payable, like software subscriptions, vendor payments, rent and utilities

Equity is the difference between your assets and liabilities on a balance sheet. It’s also known as net assets or net worth. In large businesses with investors, this represents the shareholders’ equity. In sole proprietorships and many small businesses, it represents the owner’s equity.

To read a balance sheet, start by reviewing its three main sections—assets, liabilities and owner’s or shareholders’ equity. Then look at total assets and confirm they equal total liabilities plus equity. Finally, examine current versus noncurrent assets and liabilities to understand the company’s short-term liquidity and long-term financial stability.

Reviewing balance sheet examples can also help you understand how the information is formatted and presented, and how the totals align.

Let’s say you have a company called Imaginary Division Inc. that has $456,000 in assets, $224,500 in liabilities and $231,500 in equity. The equity and liabilities add up to match the total assets amount. The information may be broken down similarly to the balance sheet example below:

Internally, SBOs can use a balance sheet to assess their business’s financial health, liquidity and solvency. Externally, investors may use the balance sheet to evaluate a business’s return on equity (ROE), while lenders may rely on it to help determine a business’s eligibility for financing.

Here are some common reasons for creating a balance sheet for your business.

A balance sheet should give you a sense of your business’s current financial health. You may use it to calculate financial ratios like ROE and compare past and current balance sheets to monitor changes in your company’s financial position over time.

You can also use a balance sheet to identify financial trends and inform business strategies. For instance, a balance sheet may help you determine whether you can take on short- or long-term financial obligations based on your current and noncurrent liabilities and assets.

While you may not have access to your competitors’ detailed financial information, you can often find industry averages for ratios such as the quick ratio and debt-to-equity (D/E) ratio from reliable business statistics and analysis sources. Your balance sheet allows you to calculate these ratios for your own business and compare them with industry benchmarks to see how your company measures up.

Benchmarking these ratios can help you understand whether your business’s liquidity (quick ratio) and debt levels (D/E ratio) are typical for your industry—or whether they may be higher or lower than similar companies.

Investors review your balance sheet—alongside other financial statements—to assess your company’s financial stability, risk level and potential returns. They may calculate key ratios, such as the D/E ratio, quick ratio and ROE, to help determine whether your business is a strong investment.

The D/E ratio shows how much your business relies on debt financing, which can signal financial risk. The quick ratio measures your ability to meet short-term obligations without relying on inventory sales, reflecting liquidity strength. ROE indicates how effectively your company generates profit from shareholders’ equity, helping investors assess performance and capital efficiency.

By analyzing these ratios over time, investors can evaluate whether your business is financially stable, sustainably profitable and positioned for long-term returns.

To create a balance sheet, follow these simple steps:

1. Set your reporting date, which is typically the last day of an accounting period.

2. Create a list of your assets, organized by current and noncurrent assets. 

3. Identify your liabilities and separate them into current and noncurrent liabilities. 

4. Calculate your owner’s or shareholders’ equity.

5. Add together your total liabilities and equity to confirm the total equals your total assets.

When preparing a balance sheet, consider the following tips:

• Use a template to minimize errors. Templates—often available through accounting or office software—can help ensure data is entered in the right place and calculations are correct.

• Determine when and how often balance sheets will be created. Balance sheets are most useful when created on set dates at regular intervals, such as quarterly or annually. Completing balance sheets on the same date(s) each year provides a more accurate sense of changes in your business’s financial position over time.

• Double-check your math. A balance sheet must balance—that is, total assets should equal total liabilities plus owner’s or shareholders’ equity. If everything doesn’t balance out, there’s likely an error on the sheet. But even if it does balance out, it’s always a good idea to double-check your math to ensure there are no mistakes or missing information.

Balance sheets are a staple of small-business financial statements. They give a snapshot of how your business is managing its assets, liabilities and equity at a given moment in time. You can leverage balance sheets to monitor your business’s financial health and support conversations with investors and lenders.

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