Understanding the Balance Sheet in QuickBooks Online: A Guide for Small Businesses
As a small business owner, keeping accurate financial records is crucial for making informed decisions, securing funding, and ensuring long-term success. One of the most important financial statements you’ll encounter is the balance sheet. If you use QuickBooks Online (QBO) for bookkeeping, understanding how to read and interpret your balance sheet can help you monitor your business’s financial health and catch potential errors before they become major problems.
In this blog post, we’ll cover:
What is a Balance Sheet?
How to Interpret a Balance Sheet in QuickBooks Online
Common Balance Sheet Errors and How to Spot Them
Why Balance Sheet Errors Get Out of Hand
Why an Accurate Balance Sheet is Essential for Your Small Business
1. What is a Balance Sheet?
A balance sheet is a financial statement that provides a snapshot of your business’s financial position at a specific point in time. It shows what your business owns (assets), what it owes (liabilities), and the owner’s equity (net worth).
The balance sheet follows the fundamental accounting equation:
Assets = Liabilities + Owner’s Equity
This means everything your business owns is financed either by debt (liabilities) or by the owner’s investment and retained earnings (equity).
2. Key Components of a Balance Sheet
Assets
Assets are resources your business owns that have economic value. They can be intangible assets such as accounts receivable (AR) or patents. They can also be tangible assets such as inventory, furniture, special equipment, and more. Cash, including any money held in company bank accounts, is also considered an asset.
In my experience, it is common for small businesses to have either accounts receivable or cash accounts as their largest asset. But of course this varies. If, for example, you run a business doing tree stump grinding, it is possible that your grinding machine which costs tens of thousands of dollars will be your biggest asset.
Another asset you will occasionally see on your balance sheet is “Good Will”. This is basically the value of your brand.
Imagine you start a pool cleaning business. At first, you only have basic equipment and one truck, with no clients because nobody has heard of you yet. You do not have a reputation for your work. Then five years later you have lots of regular clients and a reputation for your company, but you still have the same equipment as when you started. Good will in this case would be the difference between year zero and year five. The equipment is all the same, but you’ve built your brand, which is an asset in itself. So if someone wanted to buy your company from you in five years, they wouldn’t just be purchasing your equipment. They would be purchasing your brand.
Pretty neat huh? But be warned, it probably isn’t a good idea to just start adding good will to your balance sheet without cause. You should probably not change that asset value unless your CPA specifically tells you to. Still, it is good to understand what you are looking at if you are reviewing your assets.
Liabilities
Liabilities are the opposite of assets, and generally represent what your business owes to others. The most common liability is accounts payable (AP), which is typically made of bills you need to pay in exchange for buying goods or services. Also included in liabilities can be payroll liabilities (money owed to employees), tax liabilities (money owed to the government), and court judgments (money owed to another party by order of a legal court).
Loans, whether for cars, equipment, or cash, are also considered liabilities. That is why it is important to ensure that loan payments are not simply recorded as expenses. While such a procedure would capture the amount of money paid towards a loan, it would fail to account for the money still owed on the loan.
Not all liabilities are money owed to others. A good example is asset depreciation. When you buy a company car, you acquire an asset. But of course, cars depreciate in value over time. So how do you account for this in the books? It isn’t by lowering the value of the asset directly. That would mess up your books retroactively. Instead you record the depreciation as a liability to be counted against the total value of the asset. This can continue until such time as the asset is fully depreciated, at which point both the asset (car) and the liability (depreciation) can be removed from the books.
Owner’s Equity
Also called net assets, this represents the owner’s claim after liabilities are paid. Basically, this is your stake in the company. It may include:
Opening Balance Equity - Initial investment made by the owner
Owner’s Investment – Subsequent investments made by the owner.
Retained Earnings – Profits reinvested in the business.
All three of these have a positive value on equity (increase). By contrast, equity can be decreased by the following:
Personal Expenses - Company money used for non-business related expenses
Owner Distributions - Money paid from the business to the owner.
I should note that a common misconception is that revenue is an asset, or that when you operate at a loss, that loss is a liability. Not true! Both revenue and expenses fall under the category of equity. So whether you operate at a profit or loss, the result is an effect on the equity of your company. NOT the assets of your company.
The sum of all these leads to a valuation of total equity. If the equity is positive, you can think of that as the business owing money to the owner. If the equity is negative, that means the owner owes money to the business.
3. Common Balance Sheet Errors and How to Spot Them
Since the balance sheet is interconnected with all financial transactions, errors here can distort your business’s true financial position. Here are common signs of mistakes:
A. Assets Don’t Equal Liabilities + Equity
This is a major red flag, and should be reviewed by a professional bookkeeper ASAP.
B. Negative Balances Where They Shouldn’t Be
You can’t have negative money in your bank account. So if your Balance Sheet says that your bank account has a negative balance, clearly something is wrong. You also can’t have negative inventory value.
Accounts Receivable can technically be negative, but it is very uncommon, and should definitely be investigated for accuracy.
C. Accounts Receivable or Payable Don’t Match Reality
It is important to ensure that your AR and AP are always accurate. So in addition to the balance sheet, I always do a deep dive into both the AR and AP Aging Summary Reports to look for potential issues. One major red flag is if bills or invoices are over 90 days past due. While the bill/invoice could be valid at 90+ days, the more overdue a bill/invoice is showing in QB, the more likely that there has been a bookkeeping error.
If your customers generally pay on time, but your QuickBooks shows tens of thousands of dollars in AR that are overdue by 6+ months, the problem is likely not with your customers. It is with your bookkeeping.
Similarly, if your phone still works, but your QuickBooks shows that you have a phone bill that is 6 months past due, the problem is probably on your end. Afterall, if you were really that late on your bill, why would your phone company still be providing service?
D. Incorrect Equity Section
I commonly see equity accounts that should really be common expense accounts, and vice versa.
E. Duplicate accounts
If you have only one company bank account but there are 3 different accounts showing in QB, there is a problem. Typically this kind of account duplication occurs when the chart of accounts is unorganized and so the same account gets created multiple times, with the business owner not realizing there is already an account for their purposes.
4. Why Balance Sheet Errors Get Out of Hand
The main thing to remember about a balance sheet is that, unlike a profit and loss report, a balance sheet does not reset each month. Any changes made to the balance sheet will remain until such time as they are actively removed.
That is why many small businesses end up with a balance sheet that is so far from the reality of their business. The errors of all the years in business compound on each other over time, and they don’t disappear just because you start a new month, or new quarter, or new year. It takes active work to clean up a balance sheet.
To make matters worse, and I’m gonna be real here, most accountants won’t clean up your balance sheet for you. Why? Because it means potentially going through years of financial records. That is a big time investment, and most accountants simply don’t have the time for such detailed work.
That is why I get along with accountants so well! Most of the time they are happy to hand off the detailed bookkeeping work to me, so that they can focus on high level stuff like tax planning.
5. Why an Accurate Balance Sheet is Essential for Your Small Business
A correct balance sheet is more than just a report—it’s a vital tool for:
A. Making Informed Financial Decisions
Helps you assess liquidity (can you pay bills?).
Shows if you’re over-leveraged with debt.
B. Securing Loans or Investors
Lenders and investors scrutinize balance sheets to evaluate risk.
Errors can lead to loan denials or unfavorable terms.
C. Tax Compliance & Avoiding Audits
Incorrect asset or liability reporting can trigger IRS audits.
Ensures accurate tax filings (e.g., depreciation on fixed assets).
D. Identifying Fraud or Theft
Unexplained changes in cash or inventory could indicate theft.
Regular reviews help catch discrepancies early.
E. Measuring Business Growth
Comparing balance sheets over time shows trends (e.g., increasing equity = profitability).
Final Thoughts
Your balance sheet is the financial backbone of your small business. By regularly reviewing it in QuickBooks Online, you can catch errors early, maintain healthy cash flow, and make smarter business decisions.
If your balance sheet looks off, don’t panic—most errors are fixable with proper reconciliation and adjustments.
An accurate balance sheet isn’t just about numbers—it’s about confidence, clarity, and control over your business’s future.
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