Ever wish you had a crystal ball for your business? An up-to-date balance sheet might be the next best thing. It’s more than just numbers on a page. It’s a powerful snapshot of where your business stands financially, giving you a heads-up when cash flow might be heading off track.

Your balance sheet is worth spending time on—and not just once in a while. Here’s why it matters to keep it updated:

• It’s your business’s wellness check. A balance sheet gives you a quick read on how financially healthy things really are: what you own, what you owe, and what’s left over.
• It’s what the money people look at. Whether it’s investors, lenders, or even your own team, the balance sheet is one of the first places they go to understand your business.‍
• It’s part of your financial dream team. Alongside your profit and loss statement (aka income statement) and cash flow statement, your balance sheet is one of the big three financial documents you should always keep up to date.

When you’re bookkeeping for your business, keeping track of your balance sheet is an important step. If too much bookkeeping makes you shiver, don’t sweat it—we’re here to break down the jargon in a way that actually makes sense. We’ll cover:

• What is a balance sheet?
• Why is your balance sheet important?
• What are the key components of a balance sheet?
• What does an example of a balance sheet look like?
• How do I prepare and maintain an accurate balance sheet for my business?
• What are common mistakes to avoid?
• What are the differences between a balance sheet, an income statement, and a cash flow statement?
• How do these three documents work together?
• Other FAQs about balance sheets

What is a balance sheet?

A balance sheet is a moment-in-time report for your business. It shows you a current breakdown of your business’s financial state—kind of like your business’s personal scoreboard. A balance sheet shows:

• What your business owns (your assets)
• What your business owes (your liabilities)
• What’s left over for you and any other owners (your equity)

Think of your balance sheet as a financial photo you’re snapping. It’s a quick, clear picture of where your business stands on a given day, capturing exactly what your business owns, owes, and is worth in that moment. It answers: “Where do we stand today?”

Your income statement, on the other hand (also called your profit and loss statement), tells the story of your business’s performance over a period of time, like the past month or the last quarter. It answers: “How did we do over time?”

Bring ’em together, and they help you see both the big picture and the day-to-day details, giving you the full story behind your numbers.

Why is your balance sheet important?

Keeping your balance sheet fresh and up to date can seriously level up your business decisions. In a 2021 survey for Accounting Today, 67% of accountants called the balance sheet the most underused yet crucial tool for business decision-making. Talk about an unsung hero!

Another big reason why balance sheets matter so much? Lenders will often look at your balance sheet when you’re applying for a loan. If you’re applying for an SBA 7(a) loan over $350,000, for instance, you’ll need to include one.

What are the key components of a balance sheet? 

Different components of your balance sheet tell different pieces of your financial story. Let’s take a look at each of the three main components:

• Assets (What your business has)
• Liabilities (What your business owes)
• Owner’s equity (What’s left for you)

1. Assets

Your assets are everything you own or control in your business. They include things like:

• Cash on hand
• Money that you expect to collect from customers
• Inventory
• Company vehicles
• Money in the bank

When you add the value of these things together, you’ll get the total dollar value of your assets.

There are different types of assets that show up on your balance sheet, and they’re typically grouped into two buckets: current and noncurrent.

• Current assets: These are things your business expects to use, sell, or turn into cash within a year. Think cash, inventory, or accounts receivable.
• Noncurrent assets: These are more long-term investments like equipment, vehicles, or property: things you hang onto for a while. 

Knowing the difference helps you understand how quickly your business could access cash if needed, and how much is tied up in the long game.

2. Liabilities

Your liabilities are what you owe as a business. They include things like:

• Debts
• Loans or credit cards
• Wages and salaries
• Rent and utilities
• Money owed to suppliers and taxes

When entering liabilities on your balance sheet, you’ll usually split them into two different liability types: current and long-term.

• Current liabilities: These are what your business owes in the near future (usually within a year) like accounts payable, credit card debt, and upcoming loan payments. 
• Long-term liabilities: These are bigger obligations that stretch out over time, like business loans or leases that extend beyond a year.

Keeping an eye on both helps you stay ahead of what’s due now and what’s coming down the road.

Owner’s equity 

Your equity—called your owner’s equity—brings the two together. Owner’s equity is your piece of the business holdings after paying your debts and obligations. It’s what you own and control, minus what you owe:‍

Assets - Liabilities = Equity‍

Two key players can shift the numbers in this section of your balance sheet: retained earnings and owner investments.

• Retained earnings: These are the profits your business has made and decided to keep—rather than pay out to owners or shareholders. They’re reinvested back into your business and help grow your equity over time.
• Owner investments: These are money or assets you or other owners put in, like startup cash or equipment. They also increase equity by boosting what the business owns without adding debt.

Together, they tell the story of how your business has grown—by profits, and by the people backing it.

Sample balance sheet for a freelancer or small business

Now that you can read a balance sheet like a pro, let’s get into a real-world example.

Meet Maya. She’s a freelance graphic designer who’s been running her own business for about a year. She just wrapped up her first full financial year and wants to check in on her business’s financial health—so she puts together a simple balance sheet.

Maya’s Balance Sheet (as of December 31, 2024)

What do these numbers mean?

• Cash and accounts receivable are from client payments—some already received, some invoiced but not yet paid.
• Her laptop is counted as a noncurrent asset because it’s still in use and holds value.
• On the liabilities side, Maya has a small credit card balance from purchasing design tools, and an upcoming software subscription bill.
• She invested $5,000 of her own money when she started her business—that’s her owner’s investment.
• The $5,500 in retained earnings represents the profit she made this year and chose to keep in the business instead of taking out.

All these pieces of her balance sheet show that Maya’s business is in a solid position. She owns more than she owes, and she’s building value over time.

How to prepare your balance sheet (without the stress)

Making a balance sheet for the first time? Follow these steps to keep things clean and accurate.

Step 1: Gather your financial documents

Start by pulling together everything you need—bank statements, invoices, receipts, loan info, and any other records that show where your money’s been and where it’s going.

Step 2: Organize your transactions

Sort through your income and expenses in your chart of accounts so you can clearly see what your business earned, spent, borrowed, or invested during the period you’re reporting on.

Step 3: Categorize your assets and liabilities

List what your business owns (assets) and what it owes (liabilities). Be sure to separate them into current (short-term) and noncurrent (long-term) categories.

Step 4: Reconcile your transactions

To reconcile your balance sheet, start with a proper bank reconciliation process. Double-check that your numbers match your bank and financial records. Make sure everything adds up and your balance sheet stays, well... balanced!

Bonus: Save time with accounting software

Accounting software like Wave’s can save you a ton of time by automatically organizing your transactions, keeping your balance sheet up-to-date for you behind the scenes.

What are common balance sheet mistakes to avoid?

Mistakes are part of the process—but the trick is catching them before they turn into full-blown financial puzzles. To help you spot them early, let’s call out a few of the usual suspects:

• Incorrectly categorizing assets vs. expenses
• Forgetting short-term liabilities
• Ignoring depreciation

Mistake 1: Incorrectly categorizing assets vs. expenses

One of the most common mix-ups? Treating a big purchase like an expense when it should be listed as an asset.

Take something like the new laptop you bought for your business. Instead of recording it as an immediate expense, it should go under assets, since it’s something your business will use (and benefit from) for more than a year. Mixing these categories up can throw off your financial picture and your tax reporting.

Mistake 2: Forgetting short-term liabilities

It’s easy to overlook those small, short-term debts—especially if they feel minor. But they still count! Make sure you’re really thinking about all your current liabilities, including things like:

• Unpaid vendor bills
• Upcoming loan payments
• Your business credit card balance

If they’re missing, your balance sheet won’t reflect what your business really owes.

Mistake 3: Ignoring depreciation

Assets lose value over time—it’s just part of the deal. If you bought a $5,000 camera two years ago, for instance, it’s not worth $5,000 today.

Your balance sheet should reflect that gradual wear and tear. Otherwise, you’re looking at a financial picture that’s not quite realistic.

Balance sheet vs. Income statement vs. Cash flow statement

You’re fluent in “balance sheet” now—yay! But to really see your business’s financial picture, it helps to see how the balance sheet works alongside the other two key financial statements: the income statement and the cash flow statement.

Let’s take a look at what each statement does, and why you need all three in your toolkit:

• Balance sheet: A snapshot of your business’s financials “right now.” It shows what you own, what you owe, and what’s left over.
• Income statement: The story of how your business has been performing over time. It’s all about your revenue, expenses, and whether you’re turning a profit.
• Cash flow statement: A behind-the-scenes look at how money is moving in and out of your business. Super helpful for managing cash, covering bills, and staying out of those tight spots.

Here’s a quick comparison table.

Each one gives you a different lens. And depending on what you’re trying to figure out, each comes in handy at different times:

• Thinking about applying for a loan or pitching to investors? Your balance sheet shows them (and you) where your business stands—it’s your financial summary for big-picture decisions.
• Want to know if you actually made money this quarter? The income statement breaks it down by laying out your sales, expenses, and profit. It’s your go-to for tracking performance over time and spotting trends (good or bad).
• Struggling to figure out why you're profitable but still short on cash? The cash flow statement shows how money’s moving in and out, helping you stay on top of bills, payroll, and unexpected expenses.

Because profitability is about performance over time—how much money your business earned compared to what it spent—a balance sheet alone isn’t enough to show profitability.

The balance sheet only shows the current totals: how much cash you have, what customers owe you, what you owe others, and what’s left for you (your equity). This real-time glimpse into your bank account lets you see how much is in there, but it doesn’t say how it got there.

Did you earn a lot this month? Did someone just pay off a big invoice? Did you take out a loan? You need the income statement to tell the detailed story.

FAQs about balance sheets

How often should I update and review my balance sheet?

To make sure your assets and liabilities are being tracked properly, it’s important to update and review your balance sheet at least monthly. A lot can change in a month, so that regular check-in keeps your numbers reliable.

What software helps me automate my balance sheet updates?

Your balance sheet is only as accurate as your own bookkeeping. If you don’t enter the numbers, your balance sheet can’t tally them!

If you’re looking to skip the spreadsheets, Wave is a great way to streamline your balance sheet updates while keeping the rest of your bookkeeping in check. 

Do I need a balance sheet to file my business taxes?

It depends on what kind of business you have. You’ll need to include a balance sheet with your tax return if:

• You’re a corporation (C corp or S corp): If you’re running a corporation and filing Form 1120 or 1120-S, the IRS usually wants to see a Schedule L balance sheet—unless your business is really small, uses cash accounting, and stays under the $250,000 mark for both income and assets.‍
• You’re a partnership (filing Form 1065): Partnerships typically need a balance sheet too, but there’s a similar threshold. If your total receipts and assets are both under $250,000, you might be off the hook.
• ‍You use accrual accounting: If your business tracks income when it’s earned (not just when it’s received), that’s accrual accounting—and it usually means the IRS expects a balance sheet.
• ‍Your gross receipts or total assets exceed $250,000: No matter your business type, once you cross that $250K line in revenue or assets, the IRS wants that balance sheet included.

Generate your balance sheet with Wave

With Wave’s accounting software, your balance sheet builds itself, helping you gain important business insights.

As you organize and categorize your transactions, Wave keeps everything updated behind the scenes. So when you're ready to check in on your business’s financial health, it’s already done.

No spreadsheets. No guesswork. Just clear, simple insights you can actually use.

Ready to take the stress out of managing your finances? Try Wave (get started for free!) and give your inner bookkeeper a high five.

And let your balance sheet take care of itself. 😎