How to Do a Balance Sheet for a Small Business: Step-by-Step

To do a balance sheet for a small business, you list everything the business owns on a specific date, list everything it owes on that same date, and confirm that assets equal liabilities plus owner’s equity. That single equation is the whole exercise. Get the entries right in each of the three categories, and the sheet balances; miss something, and it won’t.

The Equation You’re Building Toward

Every balance sheet rests on one formula: Assets = Liabilities + Owner’s Equity. It has to balance perfectly. If total assets don’t equal the combined total of liabilities and equity, something is wrong: a missing entry, a double-counted item, or a math error.

The logic is simple. Everything the business owns was paid for either with borrowed money or with money the owners put in or earned. A truck on the lot was financed through a bank loan, bought with owner capital, or some mix of both. Once all three sections are built out, subtract total liabilities from total assets. If the result matches equity, the sheet is good. If it doesn’t, go back through the entries before doing anything else.

Pick Your Accounting Method First

Before filling in numbers, know whether the business uses cash-basis or accrual-basis accounting. The method changes what shows up on the balance sheet.

Under the cash method, revenue is recorded only when money hits the bank account and expenses only when they’re actually paid. The balance sheet shouldn’t show accounts receivable (money customers owe you) or accounts payable (bills you haven’t paid), because no cash has changed hands. Under accrual accounting, revenue is recorded when earned and expenses when incurred, regardless of when cash moves. Receivables and payables both appear.

Most small businesses start with cash-basis because it’s simpler. If the business is a C corporation or a partnership with a C corporation partner, accrual accounting is generally required once average annual gross receipts over the prior three years exceed $32 million for tax years beginning in 2026.¹ Below that ceiling, the cash method is available.² The vast majority of small businesses fall well under that number.

Pull Your Records Together

The sheet is only as accurate as the data behind it. Gather these documents before drafting anything:

Bank and credit card statements dated the exact day your balance sheet will reflect. These establish cash balances and outstanding short-term debts.
Accounts receivable aging report, if you’re on accrual accounting. It groups unpaid customer invoices by how long they’ve been outstanding: current, 1–30 days past due, 31–60, 61–90, and over 90.
Inventory records showing the cost of goods currently held for sale.
Loan agreements and amortization schedules, so you can split principal between the portion due within 12 months and the rest.
Fixed asset records: purchase prices, dates placed in service, and accumulated depreciation.
Owner contribution and withdrawal records: bank transfer receipts, shareholder agreements, and any owner draws or distributions taken during the year.

The IRS doesn’t mandate a specific bookkeeping system, but the method must clearly and accurately reflect income and expenses.³ Most owners pull this data from accounting software that can generate a balance sheet automatically. Even so, knowing how to build one manually helps you catch errors the software won’t.

List Your Assets

Assets are everything the business owns that has measurable value. Break them into categories by how quickly they convert to cash.

Current Assets

Current assets are cash or items you expect to turn into cash within one year. List them in order of liquidity, starting with the most liquid:

Cash and cash equivalents: checking and savings balances, petty cash, money market funds.
Short-term investments: marketable securities you intend to sell within the year. Under U.S. accounting rules, equity investments get adjusted to current market value on each balance sheet date.
Accounts receivable (accrual-basis only): subtract an allowance for doubtful accounts if some invoices likely won’t be paid.
Inventory: raw materials, work-in-progress, and finished goods valued at cost.
Prepaid expenses: insurance premiums, rent, or other costs already paid for a future period.

Non-Current Assets

Non-current assets are long-term property the business uses in operations rather than holding for quick sale. Under U.S. accounting rules, they go on the balance sheet at what you originally paid (historical cost), not what they’d sell for today. Over time, that recorded value gets reduced through depreciation to reflect wear, tear, and obsolescence.⁴ A delivery van bought for $40,000 three years ago might show a book value of $25,000 after depreciation, even if the resale market would pay more or less.

Machinery, vehicles, office furniture, computers, buildings, and land all fit here. Land is the exception to depreciation; it doesn’t wear out, so it stays at original purchase price indefinitely. If the business used Section 179 expensing to deduct the full purchase price of qualifying equipment in the year of purchase, those items may show a book value of zero even while still in active use.⁴

Intangible Assets

Patents, trademarks, copyrights, and purchased goodwill belong on the balance sheet too. Record them at what you paid to acquire or register them. Intangibles with a finite useful life lose value over time through amortization rather than depreciation. A patent that cost $28,000 and lasts 14 years would lose $2,000 in book value each year. Trademarks are different: because they can be renewed indefinitely, you generally don’t amortize them.

List Your Liabilities

Liabilities are the debts and obligations the business owes to others. Like assets, they split by timeframe.

Current Liabilities

Current liabilities come due within the next 12 months:

Accounts payable: unpaid bills to suppliers and vendors (accrual-basis only).
Accrued payroll and payroll taxes: wages earned by employees but not yet paid, plus your share of employment taxes.
Sales tax payable: tax collected from customers but not yet remitted to the state.
Current portion of long-term debt: principal payments on any loan due within the next 12 months. Your amortization schedule breaks this out.
Credit card balances outstanding on business cards.

Long-Term Liabilities

Long-term liabilities extend beyond one year. Commercial mortgages, equipment financing, and multi-year business loans fall here. Only the portion due after the next 12 months belongs in this section; the rest goes under current liabilities. If you owe $180,000 on a building loan and $24,000 of that is due in the next year, list $24,000 under current liabilities and $156,000 under long-term.

Potential future obligations, such as a pending lawsuit, a product warranty program, or a disputed tax bill, may need to be disclosed as contingent liabilities. If the loss is probable and you can estimate the amount, record it as an actual liability. If it’s only reasonably possible, a footnote disclosure describing the nature and estimated range of the potential loss is the standard approach. Most very small businesses won’t run into this, but it matters if you’re preparing statements for outside investors or lenders.

Calculate Owner’s Equity

Equity is what’s left after subtracting total liabilities from total assets. It represents the owners’ stake in the business. The components differ by structure.

For sole proprietors and single-member LLCs, equity is usually a single line: owner’s equity, sometimes called owner’s capital. It starts with whatever you originally invested, grows as the business earns profits, and shrinks when you take money out through owner’s draws. Draws reduce equity directly. They’re not an expense on the income statement, but they absolutely show up here.

For partnerships and multi-member LLCs, each partner gets a separate capital account tracking their contributions, share of profits, and withdrawals. S corporations handle it similarly, with shareholders taking distributions from earnings rather than draws. C corporations are the most formal: equity includes common stock, additional paid-in capital, and retained earnings, with profits distributed as dividends.

Retained earnings are a key component regardless of structure. This figure represents all the profits the business has accumulated over its lifetime that haven’t been distributed to owners. Calculate it by taking last period’s retained earnings balance, adding net income for the current period, and subtracting any draws, distributions, or dividends paid out.

Make It Balance and Check Working Capital

Once all three sections are in, run the equation. Do total assets equal total liabilities plus total equity? If not, the usual culprits are unrecorded depreciation, a loan payment that wasn’t split correctly between current and long-term, a bank transaction that hit the statement after you pulled your cash balance, or a draw that was recorded as an expense instead of an equity reduction. Work through each category methodically rather than hunting randomly.

After the equation balances, calculate working capital, which lenders will almost certainly ask about. The formula is current assets minus current liabilities. A positive number means you can pay upcoming bills from existing liquid assets. A negative number is a warning that you may need to borrow or sell assets to stay current.

The related metric is the current ratio: current assets divided by current liabilities. A ratio above 1.0 means you can cover near-term debts; below 1.0, you can’t. Lenders lean heavily on this ratio when evaluating loan applications, and a ratio well above 1.0 gives you negotiating leverage. Both numbers come straight off the balance sheet you just built.

Format the Final Document

A balance sheet uses one of two standard layouts. The report form stacks everything vertically: assets on top, liabilities in the middle, equity at the bottom. The account form puts assets on the left and liabilities plus equity on the right, mirroring the two sides of the equation. Report form is more common for small businesses because it fits standard letter-size paper.

Whichever format you use, include the business name, “Balance Sheet” as the document title, and the exact date the statement reflects. Unlike an income statement, which covers a range of dates, a balance sheet captures a single moment. Label it clearly: “As of June 30, 2026,” for example. Each major section (current assets, non-current assets, current liabilities, long-term liabilities, equity) gets its own header and subtotal, with a grand total for assets and a grand total for liabilities plus equity at the bottom. Preparing a comparative version showing the same date from two consecutive years side by side reveals trends a single snapshot can’t, and lenders and investors expect that format.

When the IRS Requires One

Not every small business has to file a balance sheet with the IRS. The rules depend on structure.

Corporations filing Form 1120 must complete Schedule L (Balance Sheets per Books) if total receipts and total assets at year-end are $250,000 or more.⁵ Below that threshold, you can skip Schedule L by checking the appropriate box on Schedule K. The same threshold applies to S corporations filing Form 1120-S.

Partnerships filing Form 1065 follow slightly different exemption rules. You can skip Schedule L if the partnership uses cash-basis accounting, or if total receipts are $250,000 or less and total assets are $600,000 or less at year-end.⁶

Sole proprietors filing Schedule C have no balance sheet requirement built into Schedule C at all. Preparing one annually is still smart practice. Banks will ask for one when you apply for a business loan, and it’s the only reliable way to track whether the business is building value or slowly bleeding equity.

How Long to Keep the Underlying Records

The IRS doesn’t set a single universal retention period. The timeline depends on the situation:⁷

Three years from the date you filed the return, in most standard situations.
Four years after the tax becomes due or is paid, whichever is later, for employment tax records.
Six years if you underreported income by more than 25% of gross income shown on the return.
Seven years if you filed a claim for a loss from worthless securities or a bad debt deduction.
Indefinitely if you never filed a return or filed a fraudulent one.

Seven years is often cited as a safe blanket rule, and it’s a reasonable default if you’d rather not track different timelines for different documents. Keep both digital and physical copies of your balance sheets, the underlying records that support them, and the tax returns they feed into. If the IRS examines a return, they’ll want to see the documentation behind every number, not just the finished statement.³

1
Internal Revenue Service. Rev. Proc. 2025-32
2
Office of the Law Revision Counsel. 26 USC 448 – Limitation on Use of Cash Method of Accounting
3
Internal Revenue Service. Topic No. 305, Recordkeeping
4
Internal Revenue Service. Publication 946 (2024), How To Depreciate Property
5
Internal Revenue Service. 2025 Instructions for Form 1120 – U.S. Corporation Income Tax Return
6
Internal Revenue Service. Instructions for Form 1065 – U.S. Return of Partnership Income
7
Internal Revenue Service. How Long Should I Keep Records