Bookkeeping Basics · Edmonton
How to read a balance sheet, one line at a time.
The balance sheet is a snapshot of what your business owns, what it owes and what's left for you. Here's how to read it in ten minutes and spot the problems hiding in it.
By the Plum team- Updated Oct 2026
- 9 min read
- A balance sheet is a snapshot on one date: assets on one side, liabilities and equity on the other.
- Assets always equal liabilities plus equity. That's the whole logic of double-entry bookkeeping.
- Compare current assets to current liabilities to see if you can cover the next twelve months of bills.
- Odd signs and stale balances (negative bank, old undeposited funds, opening balance equity) are your clues that the books need work.
Most owners open the profit and loss, check the bottom line, and close the file. That's a shame, because the balance sheet tells you things the P&L never will: whether you can pay your GST bill, how much you really owe on the truck, and whether your books are even right. Learning how to read a balance sheet takes about ten minutes, and you only have to learn it once.
This guide walks through every section with a worked example from a hypothetical Edmonton corporation, shows three quick ratios worth checking, and points out the mistakes we see most often when we open a new client's QuickBooks file.
1What a balance sheet actually is
A balance sheet (also called a statement of financial position) lists everything the business owns and owes at one moment in time, usually the last day of a month or year. It has three sections:
- Assets: what the business owns or is owed. Cash, accounts receivable, equipment, vehicles, prepaid expenses.
- Liabilities: what the business owes others. Credit cards, supplier bills, GST payable, payroll remittances, loans.
- Equity: what's left for the owners. Share capital, retained earnings and this year's profit for a corporation; owner's capital and draws for a sole proprietor.
The rule that ties it together is Assets = Liabilities + Equity. Every transaction you record touches at least two accounts, which is why the two sides always match. If you want the mechanics behind that, read our explainer on double-entry bookkeeping.
2A worked example: reading a balance sheet line by line
Say you run a small incorporated renovation design firm. Here's your balance sheet at December 31. All numbers are made up for the example.
| Account | Amount |
|---|---|
| Current assets | |
| Chequing | $28,400 |
| Accounts receivable | $14,600 |
| Prepaid insurance | $1,800 |
| Total current assets | $44,800 |
| Long-term assets | |
| Vehicle, at cost | $42,000 |
| Less accumulated amortization | ($12,600) |
| Total assets | $74,200 |
| Current liabilities | |
| Business credit card | $3,200 |
| Accounts payable | $2,900 |
| GST payable | $4,100 |
| Current portion of vehicle loan | $7,800 |
| Total current liabilities | $18,000 |
| Vehicle loan, long-term portion | $16,200 |
| Shareholder loan (owed to you) | $5,000 |
| Total liabilities | $39,200 |
| Equity | |
| Share capital | $100 |
| Retained earnings (opening) | $13,900 |
| Net income this year | $21,000 |
| Total equity | $35,000 |
| Total liabilities and equity | $74,200 |
Now read it the way a lender or accountant would:
1. Does it balance?
Total assets are $74,200 and total liabilities plus equity are $74,200. Good. Software almost always forces this, so balancing alone doesn't prove the books are right. It just proves nothing is half-recorded.
2. Can you pay the next year's bills?
Current assets ($44,800) are what turns into cash within a year. Current liabilities ($18,000) are what you must pay within a year. Subtract them and you get working capital of $26,800. Divide them and you get a current ratio of about 2.5. Above 1 means you can cover short-term obligations; well below 1 is a warning sign.
3. Is the GST money really there?
You owe CRA $4,100 in GST. You have $28,400 in the bank, so you can pay it. But notice the trap: that $4,100 was never yours. If you mentally treat the whole bank balance as spending money, the GST bill will feel like a surprise every time.
4. How much do you owe in total?
The vehicle loan appears twice: $7,800 due in the next twelve months (current) and $16,200 after that (long-term). Together, $24,000 is still owing. Splitting a loan this way is normal at year-end and your accountant usually makes the adjustment.
5. What's the business worth on paper?
Equity of $35,000 is the book value: assets minus liabilities. It isn't what someone would pay for your company, but it's a clean measure of profit kept in the business over time. Divide total liabilities by equity and you get a debt-to-equity ratio of about 1.1, meaning the business is funded roughly half by borrowing and half by its owners.
3How one transaction moves the balance sheet
Here's how the vehicle above might have landed on the books. Say the corporation bought it for $42,000 (ignoring GST to keep it simple), paid $10,000 down and financed the rest.
| Account | Debit | Credit |
|---|---|---|
| Vehicle (asset) | $42,000 | |
| Chequing (asset) | $10,000 | |
| Vehicle loan (liability) | $32,000 | |
| Totals | $42,000 | $42,000 |
Assets went up by $32,000 net ($42,000 in, $10,000 out) and liabilities went up by $32,000. Both sides moved together, and nothing touched the P&L. That's why buying equipment doesn't reduce your profit the day you buy it. For tax, the cost is claimed over time through capital cost allowance, which we cover in capital cost allowance explained.
4Common balance sheet mistakes to look for
When we review a new file, the balance sheet is where problems show up first. Here's what to scan for:
- A negative bank balance that isn't an overdraft. Usually duplicated expenses or deposits that were never recorded. A bank account should match the bank statement on the reconciliation date.
- Undeposited funds that never clear. In QuickBooks Online, payments sit here until you group them into a deposit. A balance from months ago usually means duplicated income.
- Opening balance equity with a balance. It should be zero once setup is done. See our guide to opening balance equity in QuickBooks.
- Accounts receivable full of old invoices. Customers who paid but the payment was recorded as a new sale instead of applied to the invoice. Run an AR aging report to check.
- GST payable that doesn't match your returns. After you file and pay, the balance for that period should drop to zero.
- A credit card balance that doesn't match the statement. Reconcile cards monthly, just like bank accounts.
- A shareholder loan going the wrong way. If you've been taking money out without salary or dividends, the company may be lending to you, which has tax consequences.
5How to read a balance sheet in QuickBooks Online
In QuickBooks Online, go to Reports and search for Balance Sheet. A few settings make it far more useful:
- Set the date to a month-end that you've reconciled. A balance sheet for "today" mixes reconciled and unreconciled activity.
- Compare periods. The Balance Sheet Comparison report shows this year next to last year. Big unexplained swings are worth a question.
- Click any number to drill into the transactions behind it. This is the fastest way to find out why GST payable or accounts receivable looks wrong.
- Accounting method. Accrual shows receivables and payables. Cash basis hides them. For most corporations, accrual is the right view.
6How the balance sheet fits CRA rules
For a corporation, balance sheet information goes to CRA every year with the T2 return, using the General Index of Financial Information (GIFI) codes. The year-end balances become next year's opening balances, so an error this year carries forward until someone fixes it.
Sole proprietors report income and expenses on the T2125, which doesn't include a full balance sheet. You should still review one, because it's the only report that proves your bank, card and loan balances are correct. CRA expects records to be kept for six years from the end of the tax year they relate to, and that includes the records behind every balance.
7A ten-minute monthly routine
Pair this with our guide on how to read a profit and loss statement and you'll understand the two reports every lender, accountant and CRA auditor looks at first.
If your balance sheet has lines you can't explain, that's exactly what Plum fixes for owners in Edmonton, Sherwood Park, St. Albert and Leduc. Book a call and we'll walk through yours with you.
8Questions people ask
What is the easiest way to read a balance sheet?
Start at the bottom with equity to see what the business is worth on paper, then compare current assets to current liabilities to see whether you can pay the bills coming due this year. After that, scan for odd balances like negative bank accounts or large uncategorized amounts.
What is the difference between a balance sheet and a profit and loss statement?
The profit and loss shows performance over a period, such as a year. The balance sheet shows position on a single date: what you own, what you owe and the equity left over.
Why is GST on my balance sheet?
Once you're registered, the GST you collect belongs to CRA until you remit it, so it sits as a liability. The GST you pay on expenses reduces that liability through input tax credits.
Does a sole proprietor need a balance sheet?
The T2125 form doesn't ask for a full balance sheet, but your bookkeeping software produces one anyway and it's the best way to check that bank, credit card and loan balances are right. Corporations report balance sheet information to CRA with their T2 return.
What does a negative balance on a balance sheet mean?
Usually a mistake. A negative bank balance can mean unrecorded deposits or duplicated payments, and a negative liability often means a payment was recorded without the matching bill. Investigate any line that has the wrong sign.
Want this off your plate?
Flat-fee bookkeeping for Edmonton small businesses. Month to month, no surprises.
Book a free 15-min callThis article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.