How to read your Balance Sheet in Xero: a plain-English walkthrough

Short answer: the Balance Sheet is a snapshot of one date. The top half lists what the business has (cash in the bank, money customers owe you, equipment) and what it owes (supplier bills, GST or VAT, loans). Xero takes one from the other and shows the result as Net Assets. The bottom half, Equity, explains where that net amount came from: money the owners put in plus profit kept in the business. The two always match. For a quick monthly read, look at three things: is the bank figure right, can the cash and the money coming in cover what is due soon, and are the loans going down.

Where to find it

In Xero, go to Reporting > Balance Sheet (Accounting > Reports in the older menu). Pick the date you want (usually the last day of last month) and, in the report options, add a comparison with the same date a month ago or a year ago. One Balance Sheet on its own says little; two side by side show what moved.

The sections, top to bottom

Section in Xero	What it is	Typical lines
Bank	Cash in your bank accounts on that date, as recorded in Xero	Business account, savings account
Current Assets	Things that turn into cash within a year	Accounts Receivable (customers who owe you), prepayments, stock, a till cash float
Fixed Assets	Things the business owns and uses for years	Vehicles, equipment, less accumulated depreciation
Current Liabilities	Bills due within a year	Accounts Payable (suppliers you owe), GST or VAT, PAYE or PAYG, wages owed, credit card
Non-current Liabilities	Debts due after a year	Business loan, vehicle finance, some director loans
Net Assets	Total assets minus total liabilities	One figure
Equity	Where the net assets came from	Owner or share capital, drawings, Retained Earnings, Current Year Earnings

Two Equity lines are filled in by Xero itself. Current Year Earnings is this financial year’s profit so far, the same figure as the bottom line of your Profit and Loss for the year to date. Retained Earnings is the profit from earlier years that is still in the business, after drawings or dividends (what retained earnings are and how to calculate them).

A worked example

Made-up figures for a small service business, Balance Sheet at 31 March:

	$
Bank	24,000
Accounts Receivable	31,000
Prepayments	2,000
Total Current Assets	33,000
Equipment and vehicle (cost 40,000, less depreciation 12,000)	28,000
Total Assets	85,000
Accounts Payable	9,000
GST owed	6,500
PAYG and wages owed	3,500
Credit card	2,000
Total Current Liabilities	21,000
Vehicle loan	18,000
Total Liabilities	39,000
Net Assets	46,000
Owner capital	1,000
Retained Earnings	30,000
Current Year Earnings	15,000
Total Equity	46,000

How to read it:

• Can it pay what is due? Cash plus current assets is $57,000 against $21,000 due within a year, about 2.7 times cover, which looks comfortable. But look closer: cash alone is $24,000 against $21,000 due, so most of the comfort depends on collecting the $31,000 customers owe. If a big chunk of that is overdue, the business is tighter than it looks. Check the aged receivables report, or the debtor days calculator for how fast customers pay. The working capital calculator turns these lines into a current ratio and quick ratio.
• Not all the cash is yours. $6,500 of GST and $3,500 of PAYG and wages are money held for the tax office and staff. Take those off and the bank is closer to $14,000 of spendable cash.
• The business is worth $46,000 on paper, and $45,000 of that is profit kept in the business over the years. That is healthy. If Equity is negative, the business owes more than it owns, and that needs a conversation with your accountant.
• The profit is not all in the bank. This year’s profit is $15,000, but much of it is sitting in unpaid invoices and in the equipment. That is the usual reason profit and bank balance differ (see profit in Xero but no cash in the bank).

Five lines to check every month

1. Bank matches the bank statement. If the Balance Sheet bank figure differs from what the bank says on the same date, there are unreconciled lines in Xero, and every other figure is less reliable until they are done. If it still differs after reconciling, see why the Xero bank balance does not match the bank.
2. Accounts Receivable against last month. Rising faster than sales means customers are paying slower. See who owes me money? for how to find out who.
3. GST or VAT owed. Set it aside. It is the line owners most often spend by mistake and then cannot pay on the due date.
4. Loans going down. Compare with a year ago. A loan or credit card balance that keeps rising while the business reports a profit is worth asking about.
5. Odd accounts at zero. Suspense, clearing accounts and Xero’s Historical Adjustment account should usually be zero or close to it. A balance there means something was posted without a proper home, often from opening balances or a migration, and your bookkeeper should clear it (how to clear Suspense in Xero). Xero’s Trial Balance lists every account on one page, which makes these easy to spot (how to check it).

Why the numbers can look wrong

• Overdue invoices that will never be paid still count as an asset until someone writes them off, so receivables (and profit) can be overstated.
• Depreciation not entered makes equipment look worth more than it is. Many small businesses only post it at year end, so mid-year Balance Sheets overstate fixed assets (depreciation in Xero shows how to run it monthly). The year-end checks in the Xero annual report guide cover depreciation, stock, loans and the other accounts to tie out.
• Owner spending through the business shows up as drawings, a director loan, or in the wrong expense account. If you take money out, ask your bookkeeper which account it goes to. In a UK limited company, money taken that is not salary or a dividend goes on the director’s loan account, and an overdrawn balance can cost tax. In an Australian Pty Ltd company, a loan to a shareholder or director that shows as an asset (often named “Loan to director” or after the person) falls under Division 7A: unless it is repaid or put under a written loan agreement by the company’s tax return lodgment day, it is usually taxed as an unfranked dividend.
• Accrual or cash basis. The Balance Sheet normally shows accrual figures, with receivables and payables. On cash basis those disappear. See Xero cash vs accrual.

Balance Sheet, Profit and Loss and cash flow: which answers what

• Profit and Loss: did the business make money over a period?
• Balance Sheet: what does it have and owe on one date?
• Statement of Cash Flows: why did the bank change between two dates?

Profit and loss vs balance sheet shows how the first two connect, with a year where a $30,000 profit left the bank lower.

To see how many months your cash lasts at your current costs, the free cash runway calculator does the sum without connecting Xero.

Common questions

Why does the Balance Sheet always balance? Every transaction in Xero is recorded twice, once on each side, so total assets minus total liabilities always equals total equity. When opening balances were entered that did not match, Xero puts the difference in the Historical Adjustment account so the report still balances. A balance there is a sign the setup needs tidying, not that the report is right (how to clear Historical Adjustment).

What is the difference between Current Year Earnings and Retained Earnings? Current Year Earnings is the profit for the financial year so far. Retained Earnings is the profit from all earlier years that was kept in the business. Xero works both out from the Profit and Loss and moves the year’s profit into Retained Earnings by itself after your financial year end, with no journal needed.

Is Net Assets what my business is worth? No. It is the book value: assets at what they cost less depreciation, minus what the business owes. It leaves out things a buyer pays for, such as customers, reputation and future profit, and equipment can be worth more or less than its book figure. A sale price is usually based on profit instead.

Why is the GST or VAT on the Balance Sheet different from my last return? The account holds the tax on everything recorded so far, including the current period that has not been filed yet, plus anything from earlier returns that is still unpaid. It drops back when you record the payment to the tax office.

What does negative equity mean? The business owes more than it owns, usually because losses or drawings over the years were bigger than the money put in plus the profit kept. It is common in the first year or two, but if it keeps growing, talk to your accountant about how the debts will be paid.

How often should I look at the Balance Sheet? Once a month, at month end, after the bank accounts are reconciled, and next to the same date a month earlier. That is enough to see receivables, tax owed and loans moving before they become a problem.

Getting this without running the reports

ReportPilot reads your Xero figures and sends a short email every Monday in plain English: sales and profit against last month and the same month last year, cash in the bank against the end of last month, money owed to you that is past due, and bills due in the next two weeks. It asks Xero for read-only access, and there is a 14-day free trial with no card.