What is a Balance Sheet?

A balance sheet is a snapshot of what a company owns, what it owes, and what is left over for the owners on a single date.

How does a balance sheet work?

Three sections, one equation: assets equal liabilities plus equity. Assets are cash, receivables, and equipment. Liabilities are payables, deferred revenue, and debt. Equity is the remainder, including money investors put in and the losses you have accumulated since. It balances by construction, so an imbalance means an error.

Why does a balance sheet matter?

The income statement tells you whether the quarter went well. The balance sheet tells you whether you can survive the next one. Cash, receivables, and deferred revenue sit here, and so does the debt that can end the company regardless of how good the growth chart looks.

Where did the balance sheet come from?

Double-entry bookkeeping, codified by Luca Pacioli in 1494, though merchants in Italy had been running the method for a century before he wrote it down. The structure has barely changed since.

How do you read a balance sheet well?

Start with cash and compare it to your monthly burn, because that ratio is your runway. Look at deferred revenue, which is cash you hold but have not earned. Watch receivables growing faster than revenue, a sign customers are not paying. Check how amortization is reducing your intangible assets. And read it beside the cash flow statement, since profit and cash are not the same thing, which is the whole point of accrual accounting.

Bottom line: The income statement shows the quarter, and the balance sheet shows whether you get another one.

For more startup terminology, visit startupdefinitions.com.