What Is a Balance Sheet in Accounting?
A balance sheet is a financial statement that shows what a business owns, what it owes and what is left for owners at a specific date. Those three parts are assets, liabilities and equity. Together, they explain the financial position of the business.
Small business owners often focus on the bank balance or Profit and Loss first, but the balance sheet is where many important questions live: unpaid invoices, supplier bills, GST payable, loans, equipment, owner drawings and retained earnings.
The balance sheet answers a point-in-time question: after we count what the business owns and owes, what position are we really in?
Quick answer
A balance sheet, also called a statement of financial position, shows assets, liabilities and equity at a specific date. The Australian Accounting Standards Board’s AASB 1060 standard describes the statement of financial position as presenting an entity’s assets, liabilities and equity as of a specific date, the end of the reporting period.
For plain-English related terms, see the balance sheet glossary, accounts receivable glossary, accounts payable glossary and equity glossary.
Key points
- Assets are resources the business owns or controls.
- Liabilities are amounts the business owes.
- Equity is the residual interest after liabilities are deducted from assets.
- The balance sheet is read at a specific date, not across a period.
- It should be reviewed with the Profit and Loss and cash flow statement.
The balance sheet formula
The basic formula is:
Assets = Liabilities + Equity
You can also read it as:
Assets - Liabilities = Equity
This equation is why the balance sheet balances. If assets do not equal liabilities plus equity, something is wrong in the records or report setup.
The three main sections
| Section | Meaning | Examples |
|---|---|---|
| Assets | What the business owns or controls | Bank, accounts receivable, inventory, equipment |
| Liabilities | What the business owes | Supplier bills, GST payable, loans, payroll liabilities |
| Equity | Owner interest in the business | Owner capital, retained earnings, current earnings |
Assets and liabilities are often split into current and non-current categories. Current items are expected to turn into cash or be settled within a shorter period, often within 12 months. Non-current items last longer.
A simple balance sheet example
| Balance sheet line | Amount |
|---|---|
| Bank and cash | $18,000 |
| Accounts receivable | $9,500 |
| Equipment | $14,000 |
| Total assets | $41,500 |
| Accounts payable | $6,200 |
| GST payable | $2,300 |
| Business loan | $12,000 |
| Total liabilities | $20,500 |
| Equity | $21,000 |
In this example, assets of $41,500 minus liabilities of $20,500 leaves equity of $21,000.
The business may look healthy at first glance, but the owner should still ask detailed questions: how old are the unpaid invoices, when is GST due, and whether the loan repayments create short-term cash pressure.
What a balance sheet can reveal
Unpaid customer invoices
Accounts receivable shows income earned but not yet collected. If receivables are growing faster than sales, cash flow may be under pressure. Pair the balance sheet with an accounts receivable ageing review.
Supplier bills and tax liabilities
Accounts payable, GST payable, PAYG withholding and super liabilities can sit quietly on the balance sheet until due. These are real obligations, even if the bank balance looks comfortable today.
Asset-heavy growth
Equipment, vehicles and fit-outs may support growth, but they can also tie up cash. Use the fixed asset depreciation guide to understand how long-term assets affect reports.
Owner drawings and retained earnings
For sole traders and small companies, equity accounts help explain money introduced, drawings, profits retained and dividends or distributions. Ask your accountant how your structure should show these accounts.
Balance sheet vs Profit and Loss
| Question | Balance sheet | Profit and Loss |
|---|---|---|
| What period does it cover? | A specific date | A period of time |
| What does it show? | Assets, liabilities and equity | Income, expenses and profit |
| What question does it answer? | What position are we in? | Did we make money? |
| Common risk | Ignoring obligations and unpaid balances | Confusing profit with cash |
The Profit and Loss guide explains the performance side. The balance sheet explains the position behind that performance.
A monthly balance sheet review
- Reconcile bank accounts.
- Review accounts receivable and chase overdue invoices.
- Review accounts payable and upcoming supplier payments.
- Check GST, PAYG, payroll and super liability accounts.
- Review loan balances against statements.
- Check fixed assets and depreciation entries.
- Investigate negative or unusual balances.
- Compare equity movements with profit, drawings and contributions.
Gimbla’s bank reconciliations guide is a good starting point because unreconciled bank activity can distort the whole balance sheet.
Frequently asked questions
What is a balance sheet?
A balance sheet is a financial statement that shows assets, liabilities and equity at a specific date.
What is the balance sheet formula?
The basic formula is assets equals liabilities plus equity. Another way to say it is assets minus liabilities equals equity.
How is a balance sheet different from a Profit and Loss statement?
A balance sheet shows financial position at a point in time. A Profit and Loss statement shows income, expenses and profit over a period.
How often should a small business review its balance sheet?
Monthly review is useful, especially after bank reconciliation and before decisions about cash, debt, tax, asset purchases or owner drawings.
Conclusion
The balance sheet is one of the clearest ways to see whether a business is financially steady or quietly carrying pressure. It shows what the business owns, what it owes and what belongs to owners.
Review it with the Profit and Loss, cash flow and bank reconciliation. That combination gives a much better view than the bank balance alone.
Gimbla Contributor | May 20th, 2026