Read the three parts
Assets include cash, customer receivables, inventory and equipment. Liabilities include unpaid supplier bills, accrued obligations and borrowing. Equity is what remains after subtracting liabilities from assets; owner contributions, accumulated results and distributions can change it.
Current and longer-term categories help explain timing. Read the classifications and notes for the applicable accounting framework. Some valuable resources are not recorded as assets, and a recorded asset is not necessarily cash you can spend.
A $30,000 balance sheet at September 30
Suppose a repair business has the following balance sheet at September 30. These are simplified book amounts, not market valuations. Receivables are expected to be collected within the next year and supplies used within that period. The loan is split between its current portion and later payments.
Scroll the table sideways to compare all columns.
| Item and classification | Amount |
|---|---|
| Cash: current asset | $8,500 |
| Customer receivables: current asset | $4,000 |
| Supplies inventory: current asset | $2,500 |
| Equipment at net book amount: noncurrent asset | $15,000 |
| Total assets | $30,000 |
| Supplier bills payable: current liability | $3,000 |
| Accrued expenses: current liability | $1,000 |
| Loan principal due within one year: current liability | $2,000 |
| Remaining loan principal: noncurrent liability | $8,000 |
| Total liabilities | $14,000 |
| Equity: owner contributions and accumulated results, net | $16,000 |
| Total liabilities and equity | $30,000 |
The $30,000 of assets equals $14,000 of liabilities plus $16,000 of equity. A balanced total is only the first check: entries must also be complete, correctly valued and classified.
Working capital is not all cash
Current assets total $15,000 and current liabilities total $6,000. Subtracting them gives $9,000 of working capital, but only $8,500 of the assets is cash. Customer receivables still need collecting, and supplies are not bank funds.
A supplier may need payment before customers pay their invoices. Positive working capital alone does not cover that timing gap. Check when receivables are likely to arrive and obligations fall due, alongside a cash forecast.
See what changes when a bill is paid
Suppose the business uses $1,000 of cash to settle a bill already recorded in supplier payables. Cash falls from $8,500 to $7,500, and supplier payables fall from $3,000 to $2,000.
Total assets become $29,000 and liabilities become $13,000. Equity stays at $16,000, so assets still equal liabilities plus equity.
Paying a bill already recorded does not automatically create another expense. This example shows only that payment; other transactions and accounting adjustments are excluded.
Check what supports the balances
Confirm the business name and statement date, then reconcile cash and debt to their supporting records. Investigate old receivables, unusable inventory and missing bills. Check the loan’s near-term and later portions and explain changes from a comparable prior date.
Read the balance sheet with the P&L and cash-flow statement. The P&L reports performance over a period; the balance sheet shows amounts at a date. Neither recorded equity nor total assets guarantees a sale price for the business. Ask an accountant about unfamiliar classifications or valuation adjustments.