Balance Sheet Explained

The three sections

• Assets — cash, AR, inventory, equipment, prepaid expenses
• Liabilities — AP, credit cards, accrued payroll, loans
• Equity — owner contributions, distributions, retained earnings

The accounting equation

Assets = Liabilities + Equity. Always. If the balance sheet doesn't balance, the books are broken — not the report.

What owners should actually look at

• Cash balance — does it match the bank?
• Accounts Receivable — is anything over 60 days old?
• Credit Card balances — paid down or growing?
• Loan balances — matching the lender amortization?
• Retained Earnings — moves only by net income and prior-period adjustments

Red flags that signal a bookkeeping problem

• Negative cash on an account (means missing deposits)
• Negative AR or negative AP (categorization errors)
• Opening Balance Equity with a non-zero amount (incomplete setup)
• Retained Earnings that swings unexpectedly mid-year
• Undeposited Funds growing every month