The fundamental equation it always satisfies:

Assets = Liabilities + Equity

This equation must always balance. That’s where the name comes from.

The Three Sections

1. Assets

Assets are everything the business owns or is owed.

Current assets can be converted to cash within 12 months. Non-current (or long-term) assets are held for more than a year.

2. Liabilities

Liabilities are everything the business owes to others.

3. Equity

Equity — also called net worth or shareholders’ equity — is the residual interest:

Equity = Assets − Liabilities

For a company, equity includes:

• Paid-in capital (money invested by shareholders)
• Retained earnings (accumulated profits not paid as dividends)
• Other comprehensive income

What to Look For

Liquidity: Can the business pay its bills?

The current ratio = Current Assets ÷ Current Liabilities. A ratio above 1.0 means current assets exceed current liabilities — generally a healthy sign.

Leverage: How much does the business owe?

The debt-to-equity ratio = Total Liabilities ÷ Total Equity. A very high ratio signals the business is heavily funded by debt, which increases financial risk.

Asset quality: What makes up the assets?

A balance sheet heavy in cash and receivables is generally more flexible than one dominated by illiquid fixed assets or goodwill from acquisitions.

A Minimal Example

Notice: Total Assets (£93,000) = Total Liabilities + Equity (£35,000 + £58,000 = £93,000). It balances.

Common Mistakes When Reading a Balance Sheet

1. Ignoring off-balance-sheet items — operating leases (pre-IFRS 16) and contingent liabilities may not appear directly
2. Treating book value as market value — equipment at historical cost less depreciation rarely reflects what it could sell for today
3. Ignoring the notes — footnotes disclose accounting policies, related-party transactions, and other material information

The balance sheet rewards careful reading. Once you can navigate it comfortably, you’ll have a powerful lens for understanding any business.

The Core Difference

Cash Basis Accounting

Under cash basis, you record income when money hits your account and record expenses when you pay them. Simple. Intuitive. What your bank statement says is what your books say.

Advantages:

• Easy to understand and manage
• No need to track accounts receivable or payable
• Tax is paid on money you’ve actually received

Limitations:

• Doesn’t show the full picture — a profitable month on paper can hide cash problems
• Most lenders and investors won’t accept cash-basis financials
• Not permitted for companies above certain revenue thresholds in most jurisdictions

Accrual Basis Accounting

Under accrual accounting, revenue is recognised when earned — when you deliver the service or ship the product, regardless of when payment arrives. Similarly, expenses are recorded when incurred, not when paid.

Advantages:

• Matches revenue with the expenses that generated it (the matching principle)
• Required for GAAP compliance
• Gives a more accurate picture of long-term profitability

Limitations:

• More complex to maintain
• You may owe tax on income not yet received
• Requires tracking accounts receivable, accounts payable, and accruals

Which Should You Choose?

If you are a small service business with straightforward transactions, cash basis is often fine and significantly easier to manage. The moment you start invoicing on net-30 terms, carrying inventory, or approaching revenue thresholds that require GAAP compliance — switch to accrual.

Pro tip: If you plan to seek outside investment or a bank loan within three years, set up accrual accounting from day one. Restatements are painful and expensive.

The Hybrid Approach

Some businesses operate on a modified cash basis — using accrual principles for long-term assets and liabilities while treating short-term items on a cash basis. This isn’t GAAP compliant but is permitted for internal management reporting.

Consult your CPA before choosing your method. The choice affects your tax strategy, your bank covenants, and how you read your own financial statements.

This article is for informational purposes only. Consult a qualified accountant for advice specific to your business.

Why This Theme Exists

Most blogs look like blogs. But your audience — clients, colleagues, regulators — expects something that feels professional. The General Ledger theme takes its cues from the accounting ledger book: columnar layouts, clean typography, a palette rooted in the deep greens of traditional accounting paper.

It’s built to make your financial writing feel authoritative.

What’s Included

• Ledger-style post list — date, description, account category, and reading time in clean columns
• Beautiful table styling — accountants work with tables; your tables deserve special treatment
• Print-ready stylesheet — because some readers still print articles
• Author credentials — display your CPA, CFA, or other qualifications in the header and byline
• Dark accounting-green palette — professional, distinctive, unlike any generic theme

Sample Table

Here’s how financial data tables look in this theme:

Notice how numbers align right and the double-underline signals a balance. These are built in.

Getting Started

Edit _config.yml to set your name, credentials, firm, and description. Posts go in _posts/ following the standard Jekyll naming convention: YYYY-MM-DD-title.md.

Your first journal entry is live. Welcome to the ledger.