How to Read a Balance Sheet, With a Small Business Balance Sheet Example
- Targeted Accounting
- Bookkeeping
Table of Contents
How to Read a Balance Sheet
A balance sheet is a snapshot of your business on one day: what it owns, what it owes and what is left for the owners. Most owners read the income statement first because profit is easy to follow. The balance sheet is where problems show up early, such as a tax balance that keeps growing, money the owner took out that the CRA can treat as income, or a cash figure that no longer matches the bank.
This guide walks through a sample balance sheet for a small Canadian corporation line by line, then covers the ratios a lender calculates and the red flags we check when we take on a new client. It is part of our series on monthly financial statements and year-end reporting. If some of the terms are new, our guide to bookkeeping basics is a good place to start.
The Balance Sheet Equation: Assets, Liabilities and Equity
Every balance sheet follows one equation: assets = liabilities + equity. The left side lists what the business owns or is owed. The right side shows who has a claim on those assets: lenders, suppliers and the government first, then the owners. If the two sides do not agree, the books are wrong.
Both sides are split by timing:
- Current assets: cash and anything expected to turn into cash within 12 months, such as accounts receivable, inventory and prepaid expenses.
- Long-term assets: things the business uses for more than a year, such as equipment, vehicles, computers and leasehold improvements.
- Current liabilities: amounts due within 12 months, including supplier bills, HST owing, payroll remittances, corporate tax and the next 12 months of loan principal.
- Long-term liabilities: debt due after 12 months, such as the rest of a term loan.
- Equity: what the owners paid for their shares, plus profits kept in the company.
The split matters because current assets pay current liabilities. A profitable company can still run short of cash when most of its money is tied up in equipment and its bills are due next month.
Balance Sheet Example for a Small Canadian Corporation
Here is a simplified balance sheet for a fictional Ontario renovation company, Northfield Renovations Inc., at its December 31, 2025 year end.
| Northfield Renovations Inc., December 31, 2025 | $ |
|---|---|
| Current assets | |
| Cash | 48,200 |
| Accounts receivable | 36,500 |
| Inventory | 12,300 |
| Prepaid expenses | 3,000 |
| Total current assets | 100,000 |
| Equipment and vehicles, at cost | 85,000 |
| Less accumulated amortization | (32,000) |
| Total assets | 153,000 |
| Current liabilities | |
| Accounts payable and accrued liabilities | 18,400 |
| HST payable | 7,600 |
| Deferred revenue (customer deposits) | 9,000 |
| Corporate income tax payable | 5,000 |
| Current portion of term loan | 10,000 |
| Due to shareholder | 15,000 |
| Total current liabilities | 65,000 |
| Term loan, less current portion | 30,000 |
| Total liabilities | 95,000 |
| Share capital | 100 |
| Retained earnings | 57,900 |
| Total equity | 58,000 |
| Total liabilities and equity | 153,000 |
Total assets of $153,000 equal total liabilities of $95,000 plus equity of $58,000. That check is the first thing to look at on any balance sheet.
Balance Sheet Lines That Confuse Business Owners
Most lines above explain themselves. These are the ones clients ask about most:
- Due to shareholder: money the owner put into the company, or business costs the owner paid personally, that the company has not yet repaid. Northfield owes its owner $15,000 and can repay it without tax. Because the owner can ask for it back at any time, it usually sits in current liabilities.
- Due from shareholder: the reverse, where the owner has taken out more than they put in. This debit balance is the one that causes tax problems, covered in the red flags below.
- HST payable: HST charged to customers minus input tax credits on purchases, for periods not yet paid. It is not your money, and it should match what your filed returns say you owe plus the current period.
- Deferred revenue: deposits for work not yet done. Northfield’s $9,000 is deposits on January jobs. It becomes revenue when the work is done, so until then it is a liability.
- Accumulated amortization: the wear on equipment recorded so far. Northfield’s equipment cost $85,000 and $32,000 has been expensed, leaving a net book value of $53,000. That is an accounting estimate, not a resale value, and it usually differs from the capital cost allowance claimed on the tax return.
- Retained earnings: all profits since the company started, minus all dividends paid. This is the line that ties the balance sheet to the income statement.
Northfield’s retained earnings reconcile like this: opening balance of $42,400, plus 2025 net income of $25,500, minus dividends of $10,000, equals the closing balance of $57,900. Your accountant should be able to walk you through the same calculation for your company.
Balance Sheet Ratios Lenders Calculate
A banker reading your balance sheet will work out a few ratios within minutes. Using Northfield’s numbers:
- Working capital and current ratio: current assets minus current liabilities gives working capital of $35,000. Current assets divided by current liabilities gives a current ratio of 1.54 ($100,000 ÷ $65,000). BDC’s definition of the current ratio notes that most businesses aim to keep it between 1.70 and 2.0.
- Debt to equity: total liabilities divided by total equity. Northfield’s is 1.64 ($95,000 ÷ $58,000). Lenders compare it with other businesses in the same sector, as BDC explains in its debt-to-equity glossary entry, and a ratio that rises every year tells them the company is growing on borrowed money rather than profit.
- Quick ratio: current assets less inventory and prepaid expenses, divided by current liabilities. Northfield’s is about 1.30 ($84,700 ÷ $65,000). It tests whether the business could pay its short-term bills without selling inventory.
Northfield’s current ratio sits below the BDC range mainly because of the $15,000 owed to the owner. A lender in that position may ask the owner to sign a postponement agreement, promising to leave the money in the company while the loan is outstanding. Our guide to financial statements for a business loan covers the cash flow ratios lenders add to these.
Balance Sheet Red Flags to Watch For
When we take over a set of books, these are the balance sheet items we check first:
- Negative equity: total liabilities larger than total assets. Past losses or withdrawals have used up everything the owners put in, and the company often depends on the owner’s money to keep going. Lenders treat it as a serious warning.
- Growing suspense or uncategorized balances: an “Ask my accountant” or uncategorized expense account that is never cleared means transactions are being posted without anyone understanding them. A few hundred dollars at month end is normal. Thousands carried for months is not.
- A bank balance that does not match the statement: the cash line should equal the bank statement on the same date, adjusted for outstanding cheques and deposits. If it does not, the reconciliation has not been done and every other number is suspect.
- A debit balance owing from the shareholder: under the CRA’s shareholder loan rules in Income Tax Folio S3-F1-C1, a loan from the company to its shareholder is generally included in the shareholder’s income unless it is repaid within one year after the end of the company’s tax year in which it was made, and the repayment is not part of a series of loans and repayments. Our guide to shareholder loan planning explains the usual fixes.
- HST payable that does not match filed returns: if the balance sheet shows $7,600 owing but your CRA account shows $12,000, either a return or the books are wrong. Both need to be fixed before year end.
How Often to Review Your Balance Sheet and What to Ask Your Bookkeeper
Read it every month, once the bank accounts are reconciled. A balance sheet you only see at year end gives you 12 months of problems to fix at once. Compare each month with the month before and with the same month last year, and look for lines that moved more than you expected.
Each month, ask your bookkeeper for:
- Reconciliations: confirmation that every bank, credit card and loan account is reconciled to the month-end statement.
- Receivables: the aged receivables list, with any customer over 60 days flagged.
- Tax balances: HST, payroll remittances and corporate tax owing, checked against your CRA accounts.
- Shareholder account: the balance and what changed it this month.
- Suspense items: a list of anything uncategorized, with a date to clear it.
At year end, your accountant uses the same balance sheet to prepare your annual financial statements. The level of statements you need depends on who will read them, which we explain in our comparison of a compilation vs review engagement.
This is general information as of October 2026, not advice for your situation.
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