How to Read a Balance Sheet (Small Business Edition)

A balance sheet tells you three things at one moment in time: what your business owns, what it owes, and what's left over for you. Most owners glance at the profit and loss report and never open this one, which is a shame — the balance sheet is where you find out whether you can actually pay the bills, and how much of the money in your bank account was never yours to spend.

The one equation the whole thing is built on

Every balance sheet, from a one-person mowing round to BHP, is the same equation:

Assets = Liabilities + Equity

Assets are what the business owns or is owed. Liabilities are what it owes to other people. Equity is the leftover — the owner's share. Rearrange it and it reads more usefully: what you own, minus what you owe, is what's yours.

That's why it "balances". It isn't a sign your books are correct; it's just arithmetic that can't come out any other way.

A real small business balance sheet

Here's a small electrical contracting company, as at 31 August 2026.

Assets of $121,000 equal liabilities of $80,400 plus equity of $40,600. It balances, as it always will.

Current versus non-current

The split is simply a 12-month line. Current assets are things you expect to turn into cash within a year — the bank account, money customers owe you, stock. Non-current assets are the ones you keep and use: vehicles, tools, fit-out, equipment.

Same on the other side. Current liabilities are what you have to pay within 12 months, including the next year of loan repayments. Non-current liabilities are the rest of the loan.

That line matters more than anything else on the page, because it's how you tell whether you're solvent in the short term. Software usually sorts it for you, but it gets it wrong when a loan is entered as a single non-current lump — worth checking.

The five things to look at every month

1. Cash, and how much of it isn't yours

The bank account shows $18,400. But GST payable ($8,400), PAYG withholding ($5,600) and super payable ($3,900) add up to $17,900 that's collected or withheld on someone else's behalf. Take that out and there's $500 of genuinely free cash.

This is the single most useful thing a balance sheet does for a small business. That money will be demanded by a BAS, a payroll run, or a super clearing house, and since payday super started on 1 July 2026 the super portion clears out within a few business days of every payday rather than sitting there for a quarter.

2. Debtors, aged — not just the total

$26,200 owed to you sounds fine until you break it up by age:

That $4,300 in the 90-plus column is 16% of everything you're owed, and the odds of collecting drop hard past 90 days. You can also work out average debtor days: receivables divided by sales including GST for the period, multiplied by the days in the period. On $96,000 of sales over the last 90 days, that's $26,200 ÷ $96,000 × 90 = about 25 days. On 14-day terms, customers are running about 11 days late on average. If that number is creeping up month to month, start chasing unpaid invoices properly.

3. Creditors and the credit card

Creditors of $21,700 is money you owe suppliers. Compare it to the same period last month. If creditors are climbing while sales are flat, you're funding the business off your suppliers — which works right up until one of them puts you on stop credit. The credit card balance belongs in the same mental bucket.

4. The ATO and super accounts

GST payable, PAYG withholding payable and super payable should look roughly like one BAS quarter's worth and one pay cycle's worth. If GST payable is far bigger than a normal quarter, either the last BAS wasn't paid, or the account hasn't been cleared out properly after lodgement, or your bookkeeping is on accruals while you report GST on a cash basis (an option for businesses with aggregated turnover under $10 million). Your software has a GST reconciliation report for exactly this — run it before you assume the number is real.

5. Loans

Check the balance is actually falling. Two things quietly stop that happening: interest-only periods, and redraws you forgot about. Also make sure the current portion — the next 12 months of principal — is separated out, because that's what your working capital calculation depends on.

Working capital and the quick ratio, in plain words

Working capital is current assets minus current liabilities. Here that's $56,000 − $54,400 = $1,600. In other words, everything due in the next year is almost exactly covered by everything coming in within the next year. There's no buffer.

Current ratio says the same thing as a multiple: $56,000 ÷ $54,400 = 1.03. Above 1.5 is comfortable, and it's what most lenders want to see. Below 1.0 means short-term debts exceed short-term assets.

Quick ratio (sometimes called the acid test) is the harsher version. It throws out stock and prepayments, because you can't pay a supplier with a shed full of cable. Cash plus debtors, divided by current liabilities: ($18,400 + $26,200) ÷ $54,400 = 0.82. So for every dollar due in the next 12 months, there's 82 cents of cash or near-cash.

None of these are pass/fail. They're a nudge to look at timing, which is what a 13-week cash flow forecast is for.

How it connects to your P&L

The two reports share one line. Profit for the period flows into retained earnings:

Opening retained earnings ($33,700) + profit after tax ($9,300) − dividends paid ($2,500) = closing retained earnings ($40,500).

So a profitable month pushes equity up, and a loss pulls it down. It's also why profit and cash are different animals: paying down $12,000 of loan principal never appears on the P&L at all, but it drains the bank account and shrinks a liability. Depreciation runs the other way — it's a real expense on the profit and loss statement with no cash going anywhere, and it shows up here as accumulated depreciation growing.

Worth knowing: the depreciation in your accounts and the depreciation you claim for tax often differ. If you've claimed an instant asset write-off, an asset can be worth nothing for tax while still carrying a value in your books.

Drawings, loan accounts and the Division 7A trap

How money you take out appears depends entirely on your structure.

Sole traders and partnerships. Money you take is drawings, and it reduces equity. It isn't wages and it isn't a deduction — you're taxed on the business profit whether you draw it or leave it in.

Companies. You can take money as wages (with PAYG withholding and 12% super), as a franked dividend, or as a loan. Anything that isn't the first two lands in a director's or shareholder's loan account, which shows as an asset because the company is owed it back.

That last one is where owners get caught. Under Division 7A, if a loan from a private company to a shareholder or associate isn't repaid, or put under a complying written loan agreement, before the company's tax return lodgement day for that year, the ATO can treat the outstanding amount as an unfranked dividend. You then pay tax on it at your marginal rate with no franking credit attached, on money you've already spent. The terms a complying agreement has to meet are set out in our guide to paying yourself as a sole trader versus a company.

What the balance sheet gives you is the early warning. If the loan account is larger this month than last, and larger again the month after, raise it with your accountant well before year end rather than at lodgement.

When the numbers don't add up

The balance sheet always balances, so "it doesn't balance" nearly always means something else:

• The bank figure doesn't match the bank. Compare the balance sheet against your actual statement for the same date. If they differ, the feed isn't reconciled.
• There's a suspense or clearing account with a balance. That's unallocated transactions waiting for someone to code them.
• Undeposited funds keeps growing. Payments have been recorded twice, or receipts were never matched to deposits.
• Debtors include invoices you've already been paid for. Usually a payment applied to the wrong invoice.
• Opening balances were never entered when you switched software, so the equity section is nonsense.

Every one of these is a bookkeeping fix, not an accounting mystery. A tight monthly bookkeeping routine catches all of them.

Key takeaways

• Assets = liabilities + equity. It balances by definition, so balancing proves nothing about accuracy.
• The current versus non-current split is the important line: it shows what's due in the next 12 months.
• Subtract GST, PAYG withholding and super payable from your cash balance to see what money is genuinely yours.
• Working capital is current assets minus current liabilities; the quick ratio (cash plus debtors, over current liabilities) is the honest stress test.
• Profit from your P&L lands in retained earnings, which is why the two reports have to be read together.
• A growing director's loan account is a Division 7A problem waiting to happen — deal with it before the company's tax return lodgement day.

Where to get help

Your accounting software will produce a balance sheet in a couple of clicks — run it monthly and compare it to the same date last month, not just to last year. For the ATO side (GST, PAYG withholding, super and Division 7A), ato.gov.au has the detail, and a registered tax agent or BAS agent can be checked on the Tax Practitioners Board register at tpb.gov.au before you engage them. business.gov.au has general financial management guidance for small business. If a Division 7A loan account has built up over several years, that's a conversation for a registered tax agent rather than a bookkeeper. The Australian Small Business and Family Enterprise Ombudsman and your state or territory small business commissioner both offer free support if cash flow pressure is turning into a dispute with a customer or supplier.