The balance sheet is the photograph: a snapshot of what your business owns, what it owes, and what is left for the owners at a single point in time. Six numbers, two on each side, explain most of what matters.
What you'll learn
→ The fundamental equation → Current vs non-current → Working capital → What changes month to monthThe fundamental equation
Assets = Liabilities + Equity. Always. If your balance sheet does not balance, something is wrong with the bookkeeping, usually a posting error or a missed entry. The two sides represent two views of the same business: the assets you own, and how those assets were financed (by lenders or by owners).
Equity is what is left for shareholders if you sold every asset and paid every liability. It changes through profit (retained earnings build up) and capital movements (issued shares, dividends paid, buybacks).
Current vs non-current
Current assets are those expected to convert to cash within 12 months: cash, receivables, inventory, prepayments. Non-current assets are longer-term: property, equipment, intangibles, long-term investments, deferred tax assets.
Current liabilities are due within 12 months: payables, short-term loans, current portion of long-term loans, accrued expenses, current tax. Non-current liabilities are longer: long-term loans, lease obligations beyond 12 months, deferred tax, long-service benefits.
Working capital
Working capital is current assets minus current liabilities. Positive working capital means short-term assets cover short-term obligations. Negative means a liquidity squeeze. The current ratio (current assets / current liabilities) above 1.0 is a basic health check.
Watch the components, not just the total. Receivables that are aging signal collection problems. Inventory that is growing faster than revenue signals overstocking. Payables that are aging signal you are stretching suppliers, sometimes intentional, sometimes a warning.
What changes month to month
The balance sheet moves in two ways: through the P&L (profit increases retained earnings, loss decreases) and through cashflow (collection of receivables, payment of payables, capex, financing). Reading month-on-month change reveals operational dynamics.
Three balance sheet trends to monitor monthly: cash position (the headline number), receivables growth vs revenue growth (DSO trend), and total liabilities vs equity (gearing). The rest is detail you check when needed.
This guide is general information, not professional advice. For situations that involve specific facts, talk to your accountant, or hire one of ours from the marketplace.