How to read a balance sheet
Assets, liabilities, and equity on a single date, and the equation that has to balance.
One date, three sections
The balance sheet is a snapshot. The profit and loss is the movie of a period. The snapshot always claims this identity:
Assets = Liabilities + Equity
If a report does not satisfy that equation, it is not finished. It is an export with a filter on, a prior-year entry posted to the wrong date, or a bank account that was never reconciled.
Assets
Cash is what the reconciled bank accounts hold. Accounts receivable is what customers owe you on accrual books. Inventory is goods you have not sold; it leaves this section through cost of goods sold. Equipment is recorded at cost. Accumulated depreciation is the contra-asset that reduces it. A $12,000 machine with $4,000 of accumulated depreciation is $8,000 on the statement, not $12,000 and not the tax basis from the MACRS table. Book basis and tax basis are allowed to differ. Land is listed at cost and is not depreciated.
Liabilities
Accounts payable is bills you have entered and not paid. Credit cards are the same idea with a processor in the middle. Sales tax payable is money you collected for the state. It is not equity and it is not income — the sales tax guide is blunt about that. Payroll liabilities are withholdings and the employer match you have not deposited. A loan is a liability for the principal. The interest is an expense on the profit and loss as it accrues or as you pay it, depending on your method.
Equity
Equity is the residual: what would be left if assets were sold for the amounts on the page and liabilities were paid at the amounts on the page, which is a bookkeeping statement, not a prediction of a sale. For a sole prop it often shows owner’s contributions, draws, and the current year’s profit. Profit from the income statement flows into equity. A draw flows out. Neither of those sentences is a description of an S corporation, which uses stock, additional paid-in capital, and retained earnings, and which pays shareholder-employees wages. The entity comparison is the longer version.
A tie-out you can do without software
Start with last month’s equity. Add this month’s net profit. Subtract draws. You should land on this month’s equity. If you do not, something was posted straight to equity, or the profit and loss and the balance sheet are filtered to different dates. Cash on the balance sheet, after reconciliation, is the honest input to cash runway. Receivables are not cash until they are collected.