Understanding Your Balance Sheet
The balance sheet is a snapshot at a point in time. It tells you what you own, what you owe, and what's left. It's the P&L's essential companion.
The equation
Assets = Liabilities + Equity. Always balances.
Assets: what you own — cash, A/R, inventory, equipment, buildings.
Liabilities: what you owe — A/P, loans, accrued expenses, payroll liabilities.
Equity: the difference — owner's investment plus retained earnings minus draws.
The asset side
Current assets (turn to cash within 12 months): cash, A/R, inventory, prepaid expenses.
Fixed assets (long-term): equipment, vehicles, buildings, less accumulated depreciation.
Intangible assets: goodwill, trademarks, capitalized software.
The liability side
Current liabilities (due within 12 months): A/P, credit cards, payroll taxes owed, current portion of loans.
Long-term liabilities: mortgage, term loans past 12 months, deferred tax.
The equity section
Owner contributions (money put in).
Owner draws or shareholder distributions (money taken out).
Retained earnings (accumulated net income over the years).
Current year net income (rolls into retained earnings at year-end).
Ratios that matter
Current ratio (current assets / current liabilities): should be > 1.0. Under 1.0 means near-term cash trouble.
Debt-to-equity: how leveraged you are. Higher = riskier.
Working capital (current assets – current liabilities): the cushion for daily operations.
Days sales outstanding (A/R ÷ revenue × 365): how long customers take to pay. Lower is better.
What a healthy balance sheet looks like
Bank balance ties to statements.
A/R is collectible and aging correctly.
No 'Opening Balance Equity' or 'Ask My Accountant' balances.
Loans tie to lender statements.
Retained earnings grow over time (profitable business retaining earnings).
A quick disclaimer
This article is general information for Montana small business owners, not tax, legal, or accounting advice for your specific situation. Rules change, and how they apply depends on facts we don't know about you. Before acting on anything you read here, talk to a qualified professional. If you're a Montana business owner and want a real conversation about your books, payroll, or tax, that's what Marlow Accounting is here for — call 406-290-1214 or schedule a discovery call.