What is a balance sheet?

The balance sheet is one of the three core financial statements that any business accountant will produce, alongside the profit and loss statement and the cash flow statement. Many founders are familiar with the profit and loss but less clear on what a balance sheet shows, why it is called a balance sheet, and why it matters beyond just satisfying a statutory filing requirement.

A balance sheet is a snapshot of a business's financial position at a specific point in time, showing what the business owns (assets), what it owes (liabilities), and the difference between them (equity or net assets). Assets include items such as cash, receivables, inventory, and equipment. Liabilities include creditors, loans, and tax owed. The balance sheet always balances because the assets of a business must equal its liabilities plus equity — reflecting the fundamental equation of double-entry bookkeeping.

Reading a balance sheet regularly gives founders a clearer view of their business's financial health than the bank balance alone — it shows whether the business is building value over time and whether its debts are manageable relative to its assets. It is also a key document reviewed by lenders, investors, and acquirers. Our guide to understanding financial statements covers the balance sheet and other core reports for UK founders.