How to Read a Balance Sheet for Non Accountants

A balance sheet is one of the three core financial statements every business produces, alongside the profit and loss statement and the cash flow statement. While many Calgary business owners understand their P&L, the balance sheet often feels more confusing. Here is a plain-language guide.

The Basic Equation

A balance sheet is built on one fundamental equation: Assets = Liabilities + Equity. Everything your business owns (assets) was paid for either by borrowing (liabilities) or by the owners (equity). The two sides always balance — hence the name.

Assets: What You Own

Assets are divided into current assets (things you can convert to cash within a year) and long-term assets (things with a longer useful life).

• Current assets: Cash in the bank, accounts receivable (money customers owe you), inventory, and prepaid expenses.
• Long-term assets: Equipment, vehicles, furniture, and property — shown at their purchase cost minus accumulated depreciation.

Liabilities: What You Owe

Liabilities are also divided into current (due within a year) and long-term.

• Current liabilities: Accounts payable (bills you owe), credit card balances, the current portion of loans, GST owing, and payroll liabilities.
• Long-term liabilities: Business loans, vehicle financing, and any other debts due beyond one year.

Equity: What's Left Over

Equity represents the owners' stake in the business. For a corporation, this includes share capital and retained earnings (accumulated profits that haven't been distributed). For a sole proprietor, it's the owner's equity account plus current-year earnings minus draws.

Key Ratios to Watch

• Current ratio (current assets / current liabilities): Above 1.5 is generally healthy. Below 1.0 means you may struggle to pay short-term obligations.
• Debt-to-equity ratio (total liabilities / total equity): Lower is generally better. A high ratio means heavy reliance on borrowed money.

Castle Delivers Clear Financial Statements

Every Castle Bookkeeping client receives a monthly balance sheet along with their P&L. We present it clearly and explain any significant changes month to month. Contact us for a free consultation.