Quick answer
To read a balance sheet, check the date first: it's a snapshot of one day. Then compare current assets (cash, debtors, stock) with current liabilities (suppliers, GST, PAYG withholding, super, leave, the next 12 months of loan repayments). Take the tax you're holding off your cash, question any debtors or stock that won't turn into cash, then read equity and the owner lines. That shows whether the business can pay what's coming due.
Key points
- A balance sheet is a snapshot of one day: what the business owns, what it owes, and the difference (equity).
- Current assets ÷ current liabilities gives the current ratio. Below 1 is worth a conversation with your accountant.
- GST, PAYG withholding and super payable sit in your bank account, but they belong to the ATO and your staff.
- Since Payday Super started on 1 July 2026, super payable should look like one pay run, not a quarter.
- In a company, a growing 'loan to director' line is a Division 7A question to sort out before the tax return is lodged.
To read a balance sheet, start with the date at the top. It’s a snapshot of a single day, not a period. Then put current assets (cash, debtors, stock) next to current liabilities (suppliers, GST, PAYG withholding, super, leave and the next year of loan repayments). Take the tax you’re holding off your cash, question any debtors or stock that won’t turn into money, then read equity and the owner lines. Between them they tell you whether the business can pay what’s coming due.
Most owners get the balance sheet as page two of the monthly pack. They read the P&L, then flick past a page of totals that never seem to change much. That’s a shame, because the P&L can’t answer the question that keeps people awake: if every bill due this year landed tomorrow, could we pay it? The balance sheet can.
If you’ve read our guide to reading a profit and loss, this is the other half of the job.
What does a balance sheet tell you that the P&L doesn’t?
The two reports answer different questions.
| Profit and loss | Balance sheet | |
|---|---|---|
| Covers | A period (month, quarter, year) | One day (“as at 30 September”) |
| Answers | Did we make money? | What do we own, what do we owe, and what’s left? |
| Includes loan repayments? | Interest only | The full balance still owing |
| Shows GST and tax held? | No | Yes, as liabilities |
| Shows what the owner has taken? | Only wages paid through payroll | Drawings, director loans and retained profit |
The rule tying it together is simple: assets = liabilities + equity. Equity is what would be left for the owners if every asset were sold at book value and every debt paid. It grows with retained profit and shrinks with losses and drawings.
What does a small business balance sheet look like?
Here’s an illustrative example: a café run through a company, with one coffee machine fit-out on finance, a delivery van and a handful of catering accounts.
Illustrative café Pty Ltd: balance sheet as at 30 September 2026
| Line | Amount |
|---|---|
| Cash at bank | $38,000 |
| Trade debtors (catering accounts) | $9,500 |
| Stock (beans, milk, packaging) | $7,500 |
| Total current assets | $55,000 |
| Fit-out and equipment (cost $180,000 less depreciation $72,000) | $108,000 |
| Delivery van (written-down value) | $22,000 |
| Lease security deposit | $12,000 |
| Loan to director | $18,000 |
| Total non-current assets | $160,000 |
| Total assets | $215,000 |
| Trade creditors | $14,000 |
| GST payable | $11,500 |
| PAYG withholding payable | $6,800 |
| Super payable | $2,400 |
| Provision for annual leave | $9,800 |
| Equipment loan, due within 12 months | $16,000 |
| Business credit card | $4,500 |
| Total current liabilities | $65,000 |
| Equipment loan, due after 12 months | $40,000 |
| Van loan | $12,000 |
| Total non-current liabilities | $52,000 |
| Total liabilities | $117,000 |
| Net assets / equity (share capital $100, retained earnings $97,900) | $98,000 |
Figures are illustrative. Assets of $215,000 less liabilities of $117,000 leaves equity of $98,000, so it balances. On paper this is a healthy, profitable café with $38,000 in the bank. Read it closely and the picture gets more interesting.
Current assets vs current liabilities: can you pay the next 12 months?
“Current” means it should turn into cash, or have to be paid, within 12 months. Put the two totals side by side:
- Current ratio = current assets ÷ current liabilities = $55,000 ÷ $65,000 = 0.85
- Quick ratio (leave out stock, which takes time to sell) = $47,500 ÷ $65,000 = 0.73
A ratio below 1 means the debts due this year are bigger than the liquid assets on hand to meet them. For a café, that isn’t automatically alarming. Takings arrive every day and stock turns over in days, so many hospitality businesses run below 1 for years. For a builder waiting 60 days on progress claims, the same number would be a much louder warning.
Where it does matter is direction. A ratio sliding from 1.3 to 1.0 to 0.85 over three quarters tells you the business is quietly funding something from short-term money. For company directors, there’s a sharper edge. ASIC’s guide for directors on insolvent trading (RG 217), updated in December 2024, expects directors to actively monitor the company’s financial position. Courts have long counted a liquidity ratio below 1 as one warning sign among several. It’s a pointer, not a verdict: the test is whether you can pay debts as they fall due.
GST and PAYG payable on the balance sheet: whose money is it?
This is the line that changes how owners see their bank balance. Three liabilities in our example are other people’s money sitting in the café’s account:
| Line | Who it belongs to | Amount |
|---|---|---|
| GST payable | The ATO, due with the BAS | $11,500 |
| PAYG withholding payable | The ATO, on behalf of staff | $6,800 |
| Super payable | Your employees’ super funds | $2,400 |
| Total held for others | $20,700 |
Take $20,700 off $38,000 and the café’s genuinely spendable cash is $17,300, less than half what the bank app shows. The ATO’s own guidance on GST and your cash flow recommends putting aside the GST you collect, ideally in a separate account. Our guide on how much to set aside for tax does the arithmetic for income tax as well.
Super is the line to recheck this year. Under Payday Super, which started on 1 July 2026, super has to reach each employee’s fund within 7 business days of payday, with a longer window for new starters. The old habit of letting a quarter’s super build up on the balance sheet is gone. Our café pays about $20,000 of qualifying earnings a fortnight, so $2,400 of super payable is one pay run, which is right. If your super payable looks like several pay runs, a payment has been missed or your software isn’t set up correctly. Under the new rules, late super brings an ATO-assessed super guarantee charge and possible penalties on top. Fix it this week, not next quarter.
The provision for annual leave ($9,800) is the other quiet one. It costs nothing in cash until someone resigns or the Christmas close-down arrives. Our feature on annual leave liability shows how to check that figure is right.
If you’ve just discovered the bank balance was carrying more tax than you thought, and you need a buffer while you rebuild it, check where you stand. Asking doesn’t touch your credit file.
Do the debtors and stock really exist?
Assets are only as good as their chance of becoming cash. Two lines deserve a sceptical eye:
- Trade debtors. Open your aged debtors report and match it to the balance sheet figure. Anything over 90 days, or owed by a customer who’s gone quiet, may never arrive. If $3,000 of our café’s $9,500 belongs to a catering client that has closed, real current assets are $52,000, not $55,000. Our page on chasing overdue invoices covers getting it back while you still can.
- Stock. The figure is what the stock cost, not what it would sell for. Old, slow or damaged stock flatters the balance sheet. A count against the system figure each quarter keeps it honest. See stock and cash flow for how stock ties up cash.
Owner’s equity and drawings on the balance sheet
How the owner’s money shows up depends on your structure.
Sole traders and partnerships. There’s no wage for the owner on the P&L. What you take out is recorded as drawings, which reduce owner’s equity. If equity shrinks year after year, you’re taking out more than the business earns. It’s worth knowing before it becomes a habit. Our feature on how to pay yourself covers the options.
Companies. Money the director takes without running it through payroll or a declared dividend usually lands as a loan to director, an asset on the company’s books. That’s our café’s $18,000. The ATO’s Division 7A rules can treat that loan as an unfranked dividend unless it’s repaid, or put under a complying written loan agreement, before the company’s lodgment day. Lodgment day is the earlier of the due date for the company’s tax return and the day it’s actually lodged. Minimum yearly repayments then apply. A director loan that grows every month is a conversation to have with your accountant well before tax time.
The reverse also happens. A loan from director liability means you’ve put your own money in. Lenders usually like that, and they’ll often ask whether it can stay put.
Negative equity (liabilities bigger than assets) usually comes from past losses or heavy drawings. It isn’t automatically fatal, but anyone extending credit to you will notice it.
The five-minute balance sheet check
Run this monthly, after the bank accounts are reconciled:
- Date and balance. Is it as at the right day, and do assets equal liabilities plus equity?
- Cash minus the ATO’s money. Bank balance less GST, PAYG withholding and super payable. Is the remainder enough for the next four weeks?
- Current ratio and its trend. Compare with last month and the same month last year.
- Asset quality. Do debtors match the aged report, and is any of it older than 90 days? Is stock counted and current?
- Owner lines. Are drawings or the director loan growing? Is equity heading in the right direction?
Then take what you’ve learned into your 13-week cash flow forecast. The balance sheet shows where you’re standing. The forecast shows whether the next quarter’s bills will meet the cash to pay them. The ratios also feed into the numbers every owner should know.
How a stronger balance sheet changes the borrowing conversation
Our café’s numbers tell a familiar story. The business is profitable and the equity is solid. But the short-term side is stretched: the equipment loan’s current portion, a credit card and $20,700 of tax and super are all competing for the same $38,000. Owners in this position often fund big purchases out of daily takings, then feel squeezed every BAS quarter.
Sometimes the fix is a funding decision. That might mean refinancing short-term debt over a longer term, or setting up a facility that sits ready for the quarterly peaks so the tax money stays untouched. A balance sheet you understand makes that conversation much easier, because you can explain each line and why it’s there.
That’s the conversation we have with owners every week. We consider unsecured, cash-flow and line-of-credit options for trading businesses, typically $5,000 to $500,000, and property-secured loans from $20,000 to $5,000,000. The enquiry takes about a minute, and nobody pulls your credit file just because you asked. Your details stay with us rather than being passed around a list of lenders, so your phone won’t start ringing with strangers. A real person who reads balance sheets for a living looks at your situation and calls you. Fill the form in accurately, with turnover, what you need and why, and that first call can get straight to the right option.
Frequently asked questions
What's the difference between a balance sheet and a profit and loss?
A profit and loss covers a period, like a month or a year, and shows income, expenses and profit. A balance sheet shows one day: what the business owns, what it owes and the owners' equity. The P&L explains how you got here, and the balance sheet shows where you are now.
What is a good current ratio for a small business?
Many advisers like to see 1.2 to 2, meaning current assets comfortably cover the debts due in the next 12 months. Businesses that take cash daily, like cafés, often run lower without trouble because their stock and debtors are small. The trend matters more than any one number, and a ratio below 1 that keeps falling deserves attention.
Why is GST payable on my balance sheet as a liability?
Because the GST you've collected from customers, less the GST credits on your purchases, is owed to the ATO when you lodge your BAS. It's in your account, but it isn't yours. The ATO suggests holding it in a separate account so it's there on the due date.
Where do owner drawings show on a balance sheet?
For sole traders and partnerships, drawings reduce owner's equity. They're not an expense on the P&L. In a company, money the owner takes without a wage or a declared dividend usually shows as a 'loan to director' asset, which has Division 7A consequences if it isn't repaid or put under a complying written loan agreement by the company's lodgment day.
What does negative equity on a balance sheet mean?
It means the business owes more than it owns on paper, usually after losses or heavy drawings. It doesn't automatically mean the business can't pay its bills, but lenders and suppliers will notice it, and directors should talk to their accountant about the cause and the fix.
How often should I look at my balance sheet?
Monthly, alongside your profit and loss, once your bookkeeping is reconciled. It takes about five minutes if you follow the same few checks each time, and it's worth a closer look before BAS lodgements, at 30 June and before any borrowing.