{"id":307877,"date":"2026-08-24T11:30:00","date_gmt":"2026-08-23T23:30:00","guid":{"rendered":"https:\/\/www.reckon.com\/au\/?p=307877"},"modified":"2026-08-14T13:27:44","modified_gmt":"2026-08-14T01:27:44","slug":"how-to-read-a-balance-sheet-guide","status":"publish","type":"post","link":"https:\/\/www.reckon.com\/au\/blog\/how-to-read-a-balance-sheet-guide\/","title":{"rendered":"How to read a balance sheet (and know what to do with it)"},"content":{"rendered":"

[et_pb_section fb_built=”1″ _builder_version=”4.16″ da_disable_devices=”off|off|off” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on”][et_pb_row column_structure=”1_3,2_3″ _builder_version=”4.23″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” width=”100%” custom_padding=”||0px||false|false” locked=”off” global_colors_info=”{}”][et_pb_column type=”1_3″ module_class=”table-contents” _builder_version=”4.23″ background_color=”#f3f2f6″ custom_padding=”25px||25px||true|false” sticky_position=”top” sticky_limit_bottom=”section” sticky_position_tablet=”top” sticky_position_phone=”none” sticky_position_last_edited=”on|desktop” border_radii=”on|24px|24px|24px|24px” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.23″ text_font=”||||||||” global_colors_info=”{}” background__hover_enabled=”on|desktop”][\/et_pb_text][\/et_pb_column][et_pb_column type=”2_3″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Intro” _builder_version=”4.27.7″ header_2_font_size=”32px” custom_margin=”||0px|||” custom_padding=”||28px|||” header_2_font_size_tablet=”30px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” global_colors_info=”{}”]<\/p>\n

The balance sheet is a crucial financial statement, alongside a profit & loss statement<\/a> and cash flow statement<\/a>. Each one answers a different question about your business: P&L shows your profitability; cash flow is how money moves in and out of your business; and the balance sheet gives a snapshot of what you own and owe.<\/p>\n

According to the accounting principle, everything on your balance sheet must \u201cbalance\u201d: assets equal liabilities plus equity. If the numbers don\u2019t add up, something has gone wrong. But even when a balance sheet perfectly balances, a business can still have weak spots.<\/p>\n

Let\u2019s look at how to read a balance sheet, understand the numbers, and catch the warning signs of a fragile business.<\/p>\n

The Balance sheet: Assets, liabilities and owners’ equity<\/h2>\n

Your balance sheet is made up of three components: assets (current and non-current), your liabilities (current and non-current) and owners’ equity.<\/p>\n

Assets<\/h3>\n

On a balance sheet, assets are separated into current and non-current, ranked by their liquidity<\/a> (how easily an asset converts to cash). Here are some examples:<\/p>\n\n\n\n\n\n\n\n
Current Assets<\/th>\nNon-current Assets<\/th>\n<\/tr>\n
Cash<\/td>\nCoffee machine<\/td>\n<\/tr>\n
Inventory<\/td>\nCafe furniture and fittings<\/td>\n<\/tr>\n
Prepaid expenses<\/td>\n\u00a0<\/td>\n<\/tr>\n
Accounts receivable<\/td>\n\u00a0<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Liabilities<\/h3>\n

Beneath your assets go your liabilities, separated identically into current and non-current obligations. In your balance sheet, liabilities represent the funding source for your assets \u2014 the give-and-take part of the accounting equation.<\/p>\n\n\n\n\n\n\n\n
Current Liabilities<\/th>\nNon-current Liabilities<\/th>\n<\/tr>\n
Accounts payable<\/td>\nLong-term debt<\/td>\n<\/tr>\n
GST payable<\/td>\n\u00a0<\/td>\n<\/tr>\n
PAYG payable<\/td>\n\u00a0<\/td>\n<\/tr>\n
Superannuation<\/td>\n\u00a0<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Equity<\/h3>\n

Equity is what remains after assets and liabilities are subtracted: this is what you own in the business. Depending on the structure of a business<\/a>, some components of equity differ. For sole traders and partnerships, there is a single capital account that is updated with contributions, profits, and drawings.\u00a0<\/p>\n

Interpreting your balance sheet<\/h2>\n

Interpreting your balance sheet comes down to having accurate information and asking the right questions.<\/p>\n

First, ensure your accounting data is accurate. If profit is presented incorrectly in your P&L, it affects owners’ capital and retained earnings, and incorrect inventory figures can have flow-on effects that negatively impact your cash flow.<\/p>\n

Secondly, when your balance sheet balances perfectly, ask yourself these vital questions:<\/p>\n