How to Read a Balance Sheet (Without Getting a Headache)

If your Profit and Loss Statement shows what happened this month, your Balance Sheet shows what your business owns, owes, and is worth right now.

It’s like your business’s financial selfie.

And while most people think it’s something only accountants understand, the truth is:
If you can read a pizza receipt, you can read a balance sheet.

What Is a Balance Sheet?

A balance sheet is one of the three core financial statements (along with your P&L and cash flow statement).

It’s a snapshot of your company’s financial position at a specific point in time: what you own (assets), what you owe (liabilities), and what’s left over (equity).

Here’s the formula that every balance sheet follows:

Assets = Liabilities + Equity

That’s why it’s called a balance sheet. Both sides have to equal each other.

The Three Building Blocks of a Balance Sheet

1. Assets: What You Own

Assets are everything your business owns that has value.
That includes:

• Cash in the bank

• Accounts receivable (money clients owe you)

• Inventory or property

• Equipment, furniture, vehicles

💡 Quick tip: The stronger your assets, the healthier your business foundation.
If your “cash” line is low, that’s a sign you might have great sales but weak cash flow.

2. Liabilities: What You Owe

Liabilities are debts and financial obligations, which are anything you still have to pay.
Common ones include:

• Credit card balances

• Loans or lines of credit

• Accounts payable (unpaid bills)

• Taxes owed

💡 Check this regularly: If your liabilities are growing faster than your assets, your business is taking on too much debt — even if your P&L shows profit.

3. Equity: What’s Left Over

Equity is the difference between what you own and what you owe.
In other words, it’s your net worth in the business.

It includes:

• Owner’s investment or capital contributions

• Retained earnings (profits you’ve kept in the business)

💡 Think of it like this:
If you sold all your assets today and paid off all your debts, equity is what you’d walk away with.

Why Your Balance Sheet Actually Matters

Most business owners check their P&L every month but ignore the balance sheet, which is a big mistake.

Here’s why your balance sheet matters:

• It shows your liquidity, or how easily you can pay your bills.

• It helps you get approved for loans or lines of credit.

• It shows whether your company is growing in value, not just revenue.

• It helps your accountant spot red flags before they become problems.

When you track your balance sheet monthly, you see whether your business is truly strong, not just busy.

How to Read a Balance Sheet Like a Pro

When reviewing your balance sheet:

1. Compare over time – Look at last month or last year. Are assets and equity growing?

2. Watch your debt ratio – Too much liability relative to assets = risk.

3. Check cash vs receivables – If you have high revenue but low cash, you might be waiting on too many unpaid invoices.

4. Keep it consistent – Make sure accounts are properly categorized in QuickBooks.

You don’t need to memorize accounting formulas, just look for trends and ratios that tell your financial story.

Get a Balance Sheet That Actually Makes Sense

If your balance sheet looks confusing, that’s normal. Most business owners never get shown how to read one.

At Red Leaf Bookkeeping, we make sure your numbers are clean, clear, and actually useful.
We organize your QuickBooks so your balance sheet and P&L tell the same story — no jargon, no surprises, just clarity.

👉 Book a free Money Clarity Call and finally understand where your business stands today.