Balance sheet
A financial statement that shows what a business owns (assets), what it owes (liabilities), and the residual equity at a specific point in time. Assets must always equal liabilities plus equity — this is the fundamental accounting equation.
The balance sheet is a snapshot of your business’s financial position on a given date — the last day of a month, a quarter, or a financial year. It is divided into three sections: assets (things the business owns or is owed, such as cash, debtors, and equipment), liabilities (amounts owed to others, such as supplier invoices, a bank loan, or outstanding VAT), and equity (the owners’ stake, made up of share capital plus accumulated retained profit). The two sides must always balance: assets equal liabilities plus equity.
In Xero, the balance sheet is generated automatically from your double-entry records. Every transaction touches at least two accounts, so when you pay a £4,200 invoice from a supplier, the bank balance falls by £4,200 and the accounts payable liability falls by the same amount — the balance sheet stays in equilibrium. Common month-end tasks that affect the balance sheet include posting accruals for costs not yet invoiced, clearing the suspense account, and reconciling the bank so that the cash figure on the balance sheet matches the actual closing balance.
Why it matters
Your balance sheet is the document that tells a bank, investor, or accountant whether your business is solvent. A VAT liability that is growing faster than your cash balance, or debtors that are ageing without payment, both show up here before they become a crisis. Reviewing it at month-end — not just the profit and loss — is one of the clearest signals that your books are complete and reliable.