Why It Pays to Read Your Balance Sheet

There’s more to the financial operations of a business than tracking revenue and expenses. The balance sheet shows what happened to the profit or loss and reveals the overall condition of a business.

By examining the balance sheet you see the assets acquired with your profits as well as debt you incurred to buy those assets or to cover an operating loss. You already know to monitor your available cash. The balance sheet permits you to also supervise the levels of what’s owed to you and how much you owe.

The most useful function of the balance sheet is that it permits you to locate any accounting mistakes. As the name implies, this financial report must balance, so any incorrectly reported expenses or unreported revenue must create an equally erroneous amount in an offsetting account on the balance sheet.

Some incorrect amounts are obviously too large or too small in relation to known facts. For example, you generally know about how much you paid for your inventory on hand. So a glance at the amount indicated for inventory on the balance sheet confirms some general accuracy.

In addition, the balance sheet provides an opportunity for specific accuracy of your accounting. That is, most of the figures on the balance sheet are verifiable against independent sources.

For example, cash asset balances should reconcile to bank statements, the inventory asset balance should reconcile to a physical inventory count, loan balances should reconcile to reporting by lenders and credit card balances should reconcile to monthly statements.