What Is a Balance Sheet?

The accounting equation
What's on a balance sheet

A balance sheet lists what a business owns (its assets), what it owes (its liabilities) and what's left for the owners (equity) on one date. It follows the accounting equation, assets = liabilities + equity, so its two sides are equal. The OpenStax accounting textbook defines it as a "financial statement that lists what the organization owns (assets), owes (liabilities), and is worth (equity) on a specific date".

Billed publishes this page. Definitions are quoted from the open textbook OpenStax Principles of Accounting, Volume 1, the US tax note from the IRS Instructions for Form 1120 (2025 edition), and the statement of financial position wording from the IFRS Foundation's IAS 1 page, each opened on October 29, 2026. This isn't tax or accounting advice. For your own balance sheet, ask your accountant.

The accounting equation

OpenStax: "Notice the balance sheet is the accounting equation in financial statement form: Assets = Liabilities + Owner's Equity."

Equity is what's left of the assets after the liabilities. OpenStax defines it as the "residual interest in the assets of an entity that remains after deducting its liabilities". So equity = assets − liabilities, and a balance sheet that doesn't balance has an error somewhere in the records.

What's on a balance sheet

Assets are what the business owns or controls. Each one is classed by how soon it's used up:

Current assets: an "asset that will be used or consumed in one year or less". Examples: cash, accounts receivable (money clients owe on invoices) and insurance paid in advance.
Noncurrent assets: an "asset that will be used or consumed over more than one year". Examples: equipment, shown less its accumulated depreciation, and intangible assets such as a purchased client list, shown less amortization.

Liabilities are what the business owes. They're classed the same way:

Current liabilities: a "debt or obligation due within one year or, in rare cases, a company's standard operating cycle, whichever is greater". Examples: accounts payable (bills you owe suppliers), wages owed, deposits clients paid for work not yet done, and the part of a loan due in the next 12 months.
Noncurrent liabilities: a "liability that is expected to be settled in more than one year", such as the rest of a loan.

Equity is the owners' share. For a sole proprietor, it's the owner's capital: what the owner put in, plus profits kept in the business, less what the owner took out. See equity in business.

How it connects to the other statements

A balance sheet is a snapshot of one date. OpenStax: "The balance sheet, however, lists the financial position at the close of business on a specific date." The profit and loss statement and the cash flow statement cover a period, such as a month or a year.

The statements link up. Net income from the profit and loss statement goes into the statement of owner's equity, and from there, in OpenStax's words, "The ending balance is carried forward to the balance sheet."

Worked example (sample figures)

A sample design studio, run by a sole proprietor and invented for this example, prepares its balance sheet at December 31.

Step 1: owner's equity. The owner's capital was $15,000 at the start of the year. The studio's net income for the year was $31,200, and the owner took out $24,000.

$15,000 + $31,200 − $24,000 = $22,200 owner's capital at December 31.

Step 2: assets.

Cash: $18,400
Accounts receivable (unpaid client invoices): $7,600
Prepaid insurance: $1,200
Total current assets: $18,400 + $7,600 + $1,200 = $27,200
Equipment $9,000 less accumulated depreciation $3,000: $6,000 (noncurrent)
Total assets: $27,200 + $6,000 = $33,200

Step 3: liabilities.

Accounts payable: $2,300
Client deposits for work not yet done: $1,500
Loan, part due within 12 months: $2,400
Total current liabilities: $2,300 + $1,500 + $2,400 = $6,200
Loan, part due after 12 months: $4,800 (noncurrent)
Total liabilities: $6,200 + $4,800 = $11,000

Step 4: check that it balances.

Liabilities $11,000 + equity $22,200 = $33,200, which equals total assets of $33,200.
The other way round: assets $33,200 − liabilities $11,000 = $22,200, the owner's capital from step 1.

Step 5: two liquidity measures from the same figures. OpenStax defines working capital as "current assets less current liabilities" and the current ratio as "current assets divided by current liabilities".

Working capital: $27,200 − $6,200 = $21,000.
Current ratio: $27,200 ÷ $6,200 = 4.39 (rounded).

OpenStax explains that "A ratio of greater than one indicates that the firm has the ability to meet short-term obligations with a buffer". At 4.39, the sample studio has $4.39 of current assets for each $1 of current liabilities.

What to check on your own balance sheet

The date: a balance sheet describes one date, so compare it with the same date in an earlier month or year.
It balances: total assets equal total liabilities plus equity.
Current or noncurrent: each asset and liability is in the right group. Loans are split into the part due within 12 months and the rest.
Receivables: accounts receivable includes only invoices you still expect to be paid.
Equity: the change in equity matches net income less what the owner took out, plus anything the owner put in.

US tax: Schedule L (US)

US corporations filing Form 1120 report a balance sheet on Schedule L, "Balance Sheets per Books". The IRS Instructions for Form 1120 (2025) say: "The balance sheets should agree with the corporation's books and records." Corporations with total receipts and total assets at the end of the tax year less than $250,000 "are not required to complete Schedules L, M-1, and M-2" if they check the Yes box on Schedule K, question 13.

Other business types file different returns, so ask your accountant what yours needs.

Where Billed fits

Accounts receivable: the money clients owe you on invoices is the accounts receivable on a balance sheet. Billed's financial reporting page says: "See your partially paid, past due and paid invoices in a glance with Invoice reports."
Exports for your accountant: Billed's expense tracking page says its reports "can be filtered by date range and exported for your accountant, bookkeeper or tax software."

When this guide isn't for you

This is an introduction for small business owners. Consolidated statements for a group of companies, leases, investments and statements prepared for lenders or investors follow their own rules, so ask your accountant.

Frequently Asked Questions

What are the three parts of a balance sheet?

Assets, liabilities and equity. Assets are what the business owns, liabilities are what it owes, and equity is what's left for the owners. Assets and liabilities are each split into current (within one year) and noncurrent (more than one year).

Why does a balance sheet balance?

It's the accounting equation in statement form: assets = liabilities + equity. Equity is what's left of the assets after the liabilities, so the two sides are equal by definition. If they aren't, there's an error in the records.

What is the difference between a balance sheet and an income statement?

A balance sheet shows assets, liabilities and equity on one date. An income statement, also called a profit and loss statement, shows revenue, expenses and net income for a period. Net income for the period flows into equity on the balance sheet.

Is a balance sheet the same as a statement of financial position?

Yes. Statement of financial position is the name IFRS Standards use. The IFRS Foundation's summary of IAS 1 lists "a statement of financial position as at the end of the period" among the financial statements, and OpenStax describes the balance sheet as showing a business's financial position on a given date.

Do US businesses file a balance sheet with their tax return?

US corporations filing Form 1120 report one on Schedule L, unless their total receipts and total assets at the end of the tax year are less than $250,000 and they check the Yes box on Schedule K, question 13, according to the IRS Instructions for Form 1120 (2025). Other business types file different returns, so ask your accountant.

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What Is a Balance Sheet? A Simple Guide for Small Business