A balance sheet has three blocks: assets (what the business owns), liabilities (what it owes), and equity (what is left for the owners). Assets always equal liabilities plus equity. Where an income statement covers a period, a balance sheet is a snapshot on one specific day.
It is the statement owners find least approachable and the one that answers the most important question: could this business survive a bad quarter?
The three blocks
Assets — what the business owns
Split by how quickly they turn into cash.
Current assets — expected to become cash within 12 months:
Cash at bank
Debtors (money customers owe you)
Stock
Prepayments
Non-current assets — held longer term:
Property, plant and equipment, at cost less accumulated depreciation
Vehicles
Intangibles such as software or goodwill
Liabilities — what the business owes
Current liabilities — due within 12 months:
Creditors (suppliers you owe)
VAT and PAYE owed to SARS
Bank overdraft
The portion of loans repayable within a year
Non-current liabilities — due later:
Long-term loans
Finance leases beyond 12 months
Equity — what is left for the owners
Share capital
Retained earnings — accumulated profits not yet distributed
Current year profit
Assets = Liabilities + Equity. Always. If it does not balance, the books are wrong.
The four numbers to check
1. Current ratio
Current assets ÷ current liabilities.
Can you cover what is due in the next 12 months with what will become cash in the next 12 months?
Below 1.0 — a warning. More is due than is coming in.
1.0 to 1.5 — tight but workable in many industries.
Above 1.5 — comfortable.
Above 3.0 — possibly too much cash or stock sitting idle.
2. Debtors
How much are customers holding?
Debtor days = debtors ÷ revenue × 365
Thirty days is healthy for most businesses. Ninety means you are financing your customers, and every rand of growth ties up more cash.
3. Equity
Positive means the business owns more than it owes. Negative means liabilities exceed assets — the business is technically insolvent on a balance sheet basis.
Negative equity is not automatically fatal, particularly in a young business funded by a director's loan, but it has real consequences: it blocks dividends, it affects the solvency and liquidity test under the Companies Act, and it will be the first thing a lender looks at.
4. The director's loan account
Look at this before almost anything else.
A credit balance — the company owes you. Generally fine, and it is money you can draw without tax consequence.
A debit balance — you owe the company. This can trigger a deemed dividend under section 64E and 20% dividends tax, measured against the official rate of 7.75% per annum from 1 December 2025.
Most owners have never looked at this line. See what is a director's loan account.
A worked example
| Amount | |
|---|---|
| Current assets | |
| Bank | R285,000 |
| Debtors | R640,000 |
| Stock | R310,000 |
| Total current assets | R1,235,000 |
| Non-current assets | |
| Equipment (net of depreciation) | R480,000 |
| Vehicles (net) | R320,000 |
| Total assets | R2,035,000 |
| Current liabilities | |
| Creditors | R395,000 |
| VAT and PAYE owed | R210,000 |
| Loans due within 12 months | R180,000 |
| Total current liabilities | R785,000 |
| Long-term loans | R420,000 |
| Total liabilities | R1,205,000 |
| Equity | R830,000 |
What this tells you:
Current ratio: 1,235,000 ÷ 785,000 = 1.57. Comfortable.
Debtors at R640,000 are the largest single asset — larger than all the equipment and vehicles combined. On revenue of, say, R4.2 million that is 56 debtor days. Collecting even 15 days faster would release roughly R170,000 of cash.
R210,000 of the bank balance is not yours. It is VAT and PAYE owed to SARS. Real available cash is closer to R75,000 than R285,000.
Equity of R830,000 is positive and healthy.
What a balance sheet reveals that an income statement cannot
Whether you can survive a bad quarter. Profit tells you about the last period. The balance sheet tells you what you have to absorb the next one.
Whether growth is being funded properly. Growing debtors and stock with growing creditors and overdraft means growth is being funded by suppliers and the bank.
Whether you can pay a dividend. Dividends come out of retained earnings, and the company must satisfy the solvency and liquidity test.
What a buyer would pay attention to. Equity, debtor quality, and whether there is a large director's loan account to unwind at completion.
Frequently asked questions
How do I read a balance sheet? Read it as three blocks — assets, liabilities and equity — then check four numbers: the current ratio, debtors, equity, and the director's loan account. It is a snapshot on one specific day rather than a summary of a period.
What does a negative equity balance mean? Liabilities exceed assets, meaning the business is technically insolvent on a balance sheet basis. It is common in young businesses funded by director loans and is not automatically fatal, but it blocks dividends, affects the solvency and liquidity test under the Companies Act, and is the first thing a lender examines.
What is a good current ratio? Broadly, above 1.5 is comfortable, 1.0 to 1.5 is workable in many industries, and below 1.0 is a warning that more is due within 12 months than will become cash. Above 3.0 may indicate cash or stock sitting idle.
What is the difference between a balance sheet and an income statement? An income statement covers a period and shows revenue, costs and profit. A balance sheet is a snapshot on a single date showing what the business owns, owes and is worth.
Why does my balance sheet have to balance? Because assets are funded either by borrowing (liabilities) or by owners (equity). Assets always equal liabilities plus equity, and if the statement does not balance, the underlying records contain an error.
What is the most important line on a balance sheet for a small business owner? Usually the director's loan account, because it is both the most overlooked and the one with direct tax consequences. A debit balance can trigger a deemed dividend and 20% dividends tax.
Statements that answer questions
A balance sheet produced once a year, eleven months after the date it describes, cannot tell you anything you can act on.
Smartbook produces monthly management accounts including the balance sheet, with the four numbers above tracked over time and the director's loan account flagged before it becomes a tax problem.
Last reviewed: 26 July 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. Worked examples are illustrative. Ratio guidance varies considerably by industry. General guidance, not advice on your circumstances.