The balance sheet

The income statement covers a period. The balance sheet describes a single point in time: the position at the close of business on the reporting date. Northside's is dated December 31, 2025. A day later, after the first January sales and the January payroll, every line would be different.

Classified by time

Assets and liabilities are split into current and non-current. An asset is current if the company expects to realize it, sell it or consume it within twelve months or its normal operating cycle. A liability is current if it is due within twelve months. IAS 1 sets these tests for IFRS reporters (IFRS 18 carries them forward), and US GAAP uses the same idea.

The split exists so a reader can compare what turns into cash soon with what has to be paid soon. Northside's bank loan shows how the rule works in detail. The loan balance is $32,000, repayable at $8,000 a year. The $8,000 due in 2026 is current; the remaining $24,000 is non-current. One contract, two lines.

Assets at cost, less what has been used

Most assets on a small company's balance sheet are carried at historical cost, adjusted for use. Northside's equipment appears at its $72,000 cost less $12,000 of accumulated depreciation, for a carrying amount of $60,000. That figure is the portion of cost not yet charged to expense. It says nothing about what the equipment would sell for. IAS 16 allows a revaluation model for property, plant and equipment, Northside uses the cost model, and US GAAP does not permit upward revaluation.

Prepaid expenses are assets for the same reason inventory is: the cafe has paid for something it has not yet used. Northside holds $3,000 of prepaid rent (January 2026) and $2,400 of prepaid insurance (the six months of the policy that run into 2026).

Liabilities that come from operations

Bank loans are the liabilities people think of first. A second group arises from operating, and at Northside it totals $18,068: suppliers not yet paid ($9,000), wages earned but not yet paid ($4,000), gift cards not yet redeemed ($1,800) and tax owed ($3,268). Each represents something the cafe received, in goods, labour or cash, before paying for it or delivering for it.

Operating liabilities are a source of funding that carries no interest, as long as they are paid on time. A cafe that pays suppliers in 30 days and collects from customers immediately is partly financed by its suppliers.

Equity as a running total

Equity has two parts for a corporation. Share capital is what owners paid in: $60,000. Retained earnings is the cumulative total of net income less dividends since the company began. In Northside's first year:

0 + 29,412 − 6,000 = 23,412

Retained earnings is not a pile of cash. Northside's cash happens to be larger than its retained earnings, but the two are unrelated amounts recorded in different places for different reasons. A company can have large retained earnings and an empty bank account if it has spent its profits on equipment or inventory.

Three readings worth taking

Working capital is current assets less current liabilities: $73,480 − $26,068 = $47,412. It measures the cushion of short-term resources over short-term obligations.

The current ratio expresses the same comparison as a multiple: 2.82. Northside could pay its current liabilities nearly three times over from current assets, though most of those assets are cash, which is unusual and reflects a first year in which equipment was bought outright.

Debt to equity compares total liabilities with equity: 0.60. For every dollar owners have in the business, creditors have about sixty cents. Lenders look at this ratio, and loan agreements often set a maximum.

None of these readings has a universal "good" value. They are useful in trend, against loan covenants, or against figures for similar businesses.