What is a balance sheet?
Published
A balance sheet shows what a business owns (assets), what it owes (liabilities), and the difference between them (equity), at a specific date.
The equations
Basic:Assets = Liabilities + EquityExpanded:Assets = Liabilities + Capital + Retained earnings − DrawingsRetained earnings roll-forward:Closing RE = Opening RE + Net profit − DrawingsNet book value = Cost − Accumulated depreciation
A complete balance sheet - Al-Waha, 30 June 2026
| Line | SAR |
|---|---|
| Current assets | |
| Cash and bank | 182,400 |
| Accounts receivable | 96,750 |
| Inventory | 141,200 |
| Input VAT | 19,300 |
| Total current assets | 439,650 |
| Fixed assets | |
| Furniture and equipment - cost | 92,000 |
| Less: accumulated depreciation | (17,400) |
| Net fixed assets | 74,600 |
| Total assets | 514,250 |
| Current liabilities | |
| Accounts payable | 78,900 |
| Output VAT | 34,500 |
| Total current liabilities | 113,400 |
| Non-current liabilities | |
| End-of-service benefit provision | 41,600 |
| Total liabilities | 155,000 |
| Equity | |
| Capital | 200,000 |
| Retained earnings | 159,250 |
| Total equity | 359,250 |
| Total liabilities and equity | 514,250 |
Balance check: 155,000 + 359,250 = 514,250 ✓
Retained earnings derivation: 150,000 opening + 27,250 net profit − 18,000 drawings = 159,250 ✓
Six ratios computed directly from this statement
1. Current ratio = Current assets ÷ Current liabilities = 439,650 ÷ 113,400 = 3.882. Quick ratio = (Current assets − Inventory) ÷ Current liabilities = (439,650 − 141,200) ÷ 113,400 = 2.633. Working capital = Current assets − Current liabilities = 439,650 − 113,400 = SAR 326,2504. Debt ratio = Total liabilities ÷ Total assets = 155,000 ÷ 514,250 = 30.1%5. Days sales outstanding = (Receivables ÷ Revenue) × days in period = (96,750 ÷ 460,000) × 90 = 18.9 days6. Inventory turnover = Cost of sales ÷ Average inventory = 268,000 ÷ ((118,400 + 141,200) ÷ 2) = 268,000 ÷ 129,800 = 2.06× per quarter Days inventory = 90 ÷ 2.06 = 43.7 days
Reading them together: Al-Waha's liquidity is strong (3.88), collection is fast (19 days), and leverage is low (30%). But stock sits for 44 days and grew by SAR 22,800 during the quarter. That is where the cash is going: a profitable, fast-collecting business with more working capital locked in inventory than it needs.
The owner's current account, and why it matters most in family businesses
In most small Gulf businesses the owner draws from the company account and pays personal costs from it. Al-Waha's drawings for the quarter were SAR 18,000.
Without an owner's current account, that 18,000 leaks into administrative expenses:
Reported administrative expenses = 18,250 + 18,000 = SAR 36,250Reported net profit = 27,250 − 18,000 = SAR 9,250Reported net margin = 2.0% instead of 5.9%
The business appears to be less than a third as profitable as it is. Put that file in front of a bank for financing, an investor, or a valuation for a share sale, and the number on the page is wrong and indefensible.
Correct treatment: every personal withdrawal posts to the owner's current account as a reduction in equity, never as an expense.
End-of-service benefit provision
A liability that accrues with every month worked and never arrives on an invoice, which is why so many businesses ignore it. On Al-Waha's balance sheet it is SAR 41,600:
Share of total liabilities = 41,600 ÷ 155,000 = 26.8%A business that doesn't record it reports total liabilities of 113,400 instead of 155,000, and equity overstated by SAR 41,600 - an 11.6% overstatement of the company's net worth.
Frequently asked questions
Why is it called a "balance" sheet?
Because every riyal of assets has exactly one source of funding: it is either owed to someone or belongs to the owners. Both sides describe the same thing from two angles, so the balance is not a coincidence but a mathematical consequence of double-entry.
How is it different from a trial balance?
The trial balance is an internal tool showing every account including revenue and expenses; in Al-Waha's case it totals 982,400. The balance sheet is a formal statement showing only assets, liabilities, and equity after the result accounts are closed, totalling 514,250.
What separates current from non-current assets?
Current assets are expected to convert to cash or be consumed within one operating cycle, usually twelve months. Non-current assets stay in the business longer - equipment, vehicles, property.
Is a high current ratio always good?
Not necessarily. A ratio of 3.88 signals comfortable solvency, but it can equally signal idle cash, slow-moving stock, or ageing receivables. The ratio opens a question rather than answering one.
How often is it prepared?
At financial year end as a requirement, and monthly or quarterly for management use. A business reviewing it monthly spots inventory buildup or slowing collections before either becomes a cash crisis.