What is a balance sheet?

Balance sheet (definition)

A balance sheet is a financial report that summarises the financial state of a business at a point in time. It provides an overview of the value of a business’s assets, liabilities, and owner’s equity.

A balance sheet may also be called a statement of financial position.

  • What it measures: Value of things owned (including cash) versus things owed. It also reports the owner’s equity, which is the capital put in or built up, and retained earnings.
  • What it tells you: If the business is solvent (can cover its debts), and whether it gained or lost value when compared to previous balance sheets.

A balance sheet is used along with the profit and loss statement and the cash flow statement to understand the financial health of the business.

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The parts of a balance sheet

A typical small business balance sheet is split into three parts with sub-categories under each:

  • Assets: things owned by the business - listed in order of their ability to be converted to cash
  • Liabilities: things owed by the business - current liabilities are listed in order of their due date
  • Owner's equity: capital the owner has put in or built up, and retained earnings (the amount of profit left over for the business after it has paid out owner or shareholder dividends)
Accounting equation shows assets equal the sum of liabilities plus owner’s equity

The accounting equation

The assets listed on the balance sheet should always equal the sum of the liabilities plus owner’s equity. In other words, it should balance. If it doesn’t balance the reasons may include incorrect or missing data.

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This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.