A balance sheet provides a snapshot of a business’s financial position. It answers key questions: What does the company own? What does it owe? According to AccountingTools, "Total assets must always equal total liabilities and equity."

The balance sheet includes assets such as cash, inventory, and property, and liabilities such as loans and accounts payable. Owner’s equity represents the remaining interest in assets after all liabilities are deducted. Understanding the balance sheet is crucial for evaluating a company’s financial health. This financial statement is divided into three sections: assets, liabilities, and equity. Total assets must always equal the sum of liabilities and equity—a principle known as the accounting equation..

Reviewing the balance sheet regularly can help business owners assess liquidity, evaluate debt levels, and make informed investment decisions.

This system not only ensures accuracy but also provides a complete audit trail for every transaction. Over time, double-entry becomes indispensable for preparing financial statements and for meeting compliance standards. Accountants use this data to calculate key ratios such as the current ratio (liquidity) and debt-to-equity ratio (leverage), providing a deeper insight into business performance

Cash accounting records transactions only when cash changes hands, which may not reflect the real-time financial health of a business. In contrast, accrual accounting captures revenues when earned and expenses when incurred, allowing for better long-term financial planning. Assets are what a company owns, such as cash, accounts receivable, inventory, and property. Liabilities include debts and obligations like loans, accounts payable, and accrued expenses. Equity represents the owner’s interest in the company, including invested capital and retained earnings.