Balance sheet basics for small business, with example

General information for small business owners, not accounting or tax advice. How your balance sheet is set up depends on your business structure and accounting method, so check with your accountant or bookkeeper.

A balance sheet is a snapshot of what your business owns, what it owes, and what’s left over for you, on one specific day. Where a profit and loss statement tells you how a month or year went, the balance sheet tells you where the business stands right now.

This guide covers the basic equation behind every balance sheet, what goes in each section, a simple example for a small shop, how it differs from a P&L, and how often a small seller should prepare one.

The balance sheet equation

Every balance sheet rests on one line:

Assets = liabilities + equity

Everything the business owns was paid for one of two ways: with money it owes someone (liabilities) or with money that belongs to the owner (equity). So the two sides always match. If they don’t, something has been left out or entered twice.

You can flip it around to see what the business is worth to you on paper:

Equity = assets − liabilities

The sections of a balance sheet

Assets

Assets are things the business owns that have value. They’re usually split in two:

• Current assets are cash or things that will turn into cash within a year: money in the bank, cash in the register and safe, inventory, money customers or wholesale accounts owe you, and prepaid expenses like insurance paid in advance.
• Long-term assets (sometimes called fixed assets) are things you’ll use for years: a food truck, a kiln, display fixtures, a POS tablet and card reader. They’re usually shown at cost minus accumulated depreciation, which spreads their cost over their useful life.

For a product business, inventory is often the biggest asset. It’s recorded at cost, what you paid, not at retail price. Our guide to what inventory is explains why.

Liabilities

Liabilities are what the business owes. They’re also split by timing:

• Current liabilities are due within a year: unpaid supplier invoices (accounts payable), business credit card balances, sales tax you’ve collected but not yet paid to the state, wages owed, and the next twelve months of any loan payments.
• Long-term liabilities are due further out, such as the remaining balance on an equipment loan or an SBA loan.

Sales tax deserves a special mention. Money collected at the counter for sales tax is not yours. Until you send it to the state, it sits on the balance sheet as a liability.

Equity

Equity is the owner’s share. For a sole proprietor it’s often just called owner’s equity, and it moves up and down for a few reasons:

• Money you put into the business raises it.
• Profit the business earns and keeps raises it. This accumulated profit is often labeled retained earnings.
• Money you take out for yourself, called owner draws, lowers it.
• Losses lower it.

Corporations and LLCs taxed as corporations show equity a little differently, with lines for stock and retained earnings, but the idea is the same.

A simple small-shop balance sheet example

Here’s a balance sheet for a small gift shop as of December 31:

Total assets of $28,000 equal $10,000 of liabilities plus $18,000 of equity. The sheet balances.

A few things you can read straight off it:

• Can the shop pay its short-term bills? Current assets of $23,800 against current liabilities of $5,700 is a current ratio of about 4.2. Comfortable.
• How much of it is cash? Only $8,700. Most of the current assets are inventory, which has to sell before it becomes cash. That’s normal for a shop, but worth watching before a big stock order.
• How much is borrowed? Liabilities are $10,000 against $18,000 of equity, so the owner has more of their own money in the business than borrowed money.

Balance sheet vs P&L

The two reports answer different questions, and you need both to see the whole picture.

They connect in two places. First, the net income on your P&L, minus any owner draws, flows into equity on the balance sheet. Second, the ending inventory you count for cost of goods sold on the P&L is the same number that appears as inventory on the balance sheet. The $14,500 above is the gift shop’s year-end count at cost.

For a full walkthrough of the other report, with a template, see our profit and loss statement guide. And because neither report shows when cash actually moves in and out, a cash flow statement completes the set; see cash flow for small business.

How to put one together

1. Pick the date. Usually the last day of a month, quarter or year.
2. List your cash. Bank balances on that date, plus cash in the register, safe and any petty cash fund.
3. Value your inventory at cost. Count it, or use a reliable inventory valuation report, and use cost prices.
4. List other assets. Money owed to you, prepaid expenses, and equipment at cost minus depreciation.
5. List what you owe. Supplier invoices, card balances, sales tax collected but not yet paid, loan balances.
6. Work out equity. Assets minus liabilities. If you keep full books, check that this matches your contributions plus retained earnings minus draws.

Accounting software builds a balance sheet automatically from your books. If you keep simpler records, an accountant can prepare one from your bank statements, invoices and inventory count.

How often to prepare one

At a minimum, once a year at year end. Many lenders ask for a recent balance sheet with a loan application, and your accountant will want one for the business tax return. The SBA lists the balance sheet among the core financial statements every small business should keep.

Monthly or quarterly is better if you carry a lot of inventory, have loans, or are planning a big purchase. Comparing balance sheets over time shows trends a single one can’t: inventory creeping up faster than sales, a card balance that never comes down, or equity shrinking because draws are outpacing profit.

Common mistakes

• Valuing inventory at retail. It inflates assets and equity. Use cost.
• Forgetting sales tax payable. Collected tax is a debt to the state until it’s paid.
• Mixing personal and business accounts. Your personal car loan doesn’t belong here unless the business owns the car.
• Leaving out the register float. The cash in the drawer at close is a business asset too.

Where SleepingFire fits

SleepingFire is point-of-sale and inventory software, not accounting software, so it doesn’t produce a balance sheet. It does supply two of the numbers that go on one. The inventory valuation report shows your stock at cost and at retail by category, with a CSV export, and the sales tax summary shows the tax you collected for any date range, which helps your bookkeeper with sales tax payable. Shifts record a counted float and expected cash at close, so you know what’s in the drawer. See inventory management.

Frequently asked questions