What is a Balance Sheet and Why Do You Need One for Your Business?
How strong are your business’s finances? Does your business have enough assets to cover its debts? Does it have the capacity to take on additional debt?
These are questions best answered by the beloved financial statement of the balance sheet.
This blog is the final installment in a three-part series covering the accounting foundations of a business. We began with bookkeeping, followed by the income statement, and now conclude with the balance sheet. Together, these three components provide the financial clarity needed to run, manage, and grow your business as an informed owner on the necessary accounting functions.
What is a Balance Sheet?
A balance sheet (also known as the statement of financial position) outlines your business’s:
Assets (what the business owns)
Liabilities (what the business owes)
Equity (the owner’s stake in the business)
Unlike the income statement, which measures performance over time, the balance sheet reflects these items at a specific point in time. It’s like a snapshot of your business’s financial position.
The balance sheet is built on a fundamental equation:
Assets = Liabilities + Owner’s Equity
This means everything your business owns (assets) is either financed through debt (liabilities) or ownership (equity). If your balance sheet doesn’t balance, it’s a sign that something in your recordkeeping needs to be reviewed and corrected.
Within these categories, there are lots of sub-classifications (such as current vs. long-term assets and liabilities), and reporting formats can vary by industry and business size.
This post is intended to provide a high-level understanding rather than a technical deep dive (you aren’t going to finish reading this with the knowledge of an accounting major or professional). If you need help preparing or interpreting a balance sheet though, there are many free resources available and professional guidance can always be sought.
Why is the Balance Sheet Important?
The balance sheet provides valuable insight into the overall financial health of your business.
It’s commonly used to evaluate key financial ratios and assess whether your business is in a stable position. For example:
If your liabilities significantly exceed your assets, your business may struggle to meet its debt obligations.
If you’re bringing on a new partner or investor, they will want to understand the existing financial position, such as any outstanding debt they may be sharing in.
The balance sheet is often reviewed alongside the income statement to assess both profitability and financial stability. It’s also a standard document requested during loan applications and other financial evaluations, so it really cannot be ignored entirely.
When Should You Start Preparing a Balance Sheet?
Like with the income statement, preparing the balance sheet when you first start the business is recommended.
Building strong financial habits early creates a solid foundation as your business grows. That said, for very small or early-stage sole proprietors—especially those with minimal accounts (e.g., one checking account and one credit card)—it may feel unnecessary at first. This is an understandable thought.
Though even in those cases, starting early has clear benefits. A simple balance sheet is easy to maintain when your business is small, and doing so will save time, stress, and confusion as your financial situation becomes more complex.
How Can You Prepare a Balance Sheet?
Do-It-Yourself (DIY)
You can prepare a balance sheet using a spreadsheet (Excel or Google Sheets), especially if you already maintain organized bookkeeping records. When your books are clean, assembling the balance sheet becomes much more straightforward.
Hiring a Professional
You can also outsource balance sheet preparation. If you already work with a bookkeeper, this is typically included as part of their services (along with the income statement).
As with income statements, it may be difficult to find a professional willing to prepare a one-time balance sheet without ongoing bookkeeping support, so it’s worth considering a more comprehensive approach if you need assistance.
Balance Sheet and Tax Return Preparation
Depending on your business type, a balance sheet may not always be required for tax filing.
For example:
Sole proprietors generally do not need a balance sheet when filing Schedule C.
Some partnerships may also be exempt from reporting a balance sheet depending on size and other factors.
That said, even when it’s not required, preparing a balance sheet can only help. It improves organization, strengthens your financial awareness, and ensures you’re better prepared for future growth or reporting requirements.
For businesses where a balance sheet is required for the tax return filing, as with our commentary on bookkeeping and the income statement, you should not expect to dump a compilation of documents on your tax preparer and have the tax return prepared without some type of additional fee. If you want to avoid this, either invest in a bookkeeper, or invest the time to learn how to prepare it on your own.
Concluding Thoughts
The balance sheet is a critical financial statement that provides insight into your business’s overall financial health.
By understanding what your business owns, owes, and retains in equity, you gain a clearer picture of its stability and long-term viability. Starting early and maintaining an accurate balance sheet can save significant time and stress as your business grows.
Alongside bookkeeping and the income statement, it completes the core financial framework every business owner should understand and maintain.
Disclaimer:
The information provided in this blog is for general educational purposes only and should not be construed as tax, legal, or financial advice. Every individual’s situation is unique, and you should consult a qualified tax professional or financial advisor before making decisions based on this content. Akouson Financial and its representatives are not responsible for any actions taken based on the information provided herein.