Accounting glossary
Balance sheet
A balance sheet shows what your business owns (assets), what it owes (liabilities) and what belongs to the owners (capital and reserves) on one date. Assets always equal liabilities plus capital, and banks, investors and your CA read it to judge financial strength.
Why it matters to your business
Your profit tells you whether the year went well. Your balance sheet tells you whether the business is on firm ground: how much cash is locked in stock and customer dues, how much you have borrowed, and how much of the business really belongs to you. A bank deciding on a cash credit limit, or a large customer checking a new supplier, will read it before your P&L.
How it works
Assets are listed on one side, and capital and liabilities on the other. The two sides are always equal, because everything the business owns was paid for either by the owners or by someone it owes. A trader’s balance sheet on 31-03-2026 might read:
| Capital and liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Capital | ₹8,00,000 | Furniture and computers | ₹3,50,000 |
| Profit for the year | ₹2,10,000 | Stock | ₹6,20,000 |
| Bank loan | ₹2,40,000 | Trade receivables | ₹4,80,000 |
| Trade payables | ₹3,20,000 | Cash and bank | ₹1,50,000 |
| GST and TDS payable | ₹30,000 | ||
| Total | ₹16,00,000 | Total | ₹16,00,000 |
Two quick readings from this: your working capital (current assets less current liabilities) is ₹12,50,000 less ₹3,50,000, which is ₹9,00,000; and about half of your current assets sit in stock, so slow-moving items are where cash is stuck.
Common mistakes
- Stock at a guess. Closing stock drives both profit and assets. Value it from your stock records at cost or net realisable value, whichever is lower, not from a round figure.
- Old balances carried forward. Customer dues that will never be collected, or vendor advances long since adjusted, make the balance sheet look stronger than it is. Review them and write off or correct what is no longer real.
- Personal and business money mixed. Drawings, personal loans and family members’ accounts belong in the right ledgers, or the capital figure means nothing.
- Unreconciled bank balances. The bank figure on the balance sheet should match the bank statement after reconciliation.
Questions about Balance sheet
What is the difference between a balance sheet and a profit and loss account?
The profit and loss account covers a period and shows whether you earned a profit. The balance sheet is a picture on one date and shows what you own and owe. The profit for the year is added to capital or reserves in the balance sheet.
Does a proprietorship or partnership firm need a balance sheet?
It does not follow the Companies Act format, but you will still need one. Banks ask for it with loan and overdraft applications, and your income-tax return asks for balance sheet figures when you maintain books of account.
What is Schedule III?
Schedule III to the Companies Act, 2013 sets the format in which companies present their balance sheet and profit and loss account, with headings such as trade receivables, trade payables and short-term borrowings.
Why does my balance sheet not tally?
In accounting software, a difference usually comes from opening balances entered without their matching side, or closing stock that has not been valued. Check the trial balance first.
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