A balance sheet is a summary of the status of your business — its assets, liabilities, and net worth — at an instant in time. By reviewing your balance sheet along with your income statement and your cash flow forecast, you will be able to make informed financial and business planning decisions. A typical balance sheet for a new consulting service may look like this:

BALANCE SHEET

The balance sheet is drawn up using the totals from individual accounts kept in your general ledger. It shows what you have left when you pay all your creditors. Remember: Assets less Liabilities equals Capital or Net Worth. The assets and liabilities sections must be equal or balance — hence the name. It can be produced quarterly, semiannually, or at the end of each calendar or fiscal year. If your record keeping is manual you will be less likely to develop a frequently updated balance sheet. Many accounting software programs can give you a current balance sheet in just a couple of minutes.

While your accountant will be most helpful in drawing up your balance sheet, it is you who must understand it. Current assets are anything of value you own, such as cash, inventory, or property that the business owner can convert into cash within a year. Fixed assets are things such as land and equipment. Liabilities are debts the business must pay. They may be current, such as amounts owed to suppliers or your accountant, or they may be long-term, such as a note owed to the bank. Capital, also called equity or net worth, is the excess of your assets and retained earnings over the amount of your liabilities.