The balance sheet

The other three account types, at one instant — and the single line where the month's profit lands, which is what ties the two statements together.

Reading: 10 min
Teaches: 11
Sources: 4

The balance sheet is a photograph, not a film. It states what Northwind owns and owes at one instant — 30 September, close of business — using the three account types that carry forward. It is dated as at that day (US filings usually say as of), never for the period.

Northwind Traders, Inc. — balance sheet

As at 30 September 2026 · USD

Current assets
Cash — operating	32,900.00
Accounts receivable	8,000.00
Inventory	1,000.00
Prepaid insurance	6,600.00
Total current assets	48,500.00
Vehicles	24,000.00
Accumulated depreciation — vehicles	(500.00)
Total assets	72,000.00
Liabilities
Accounts payable	6,000.00
Accrued liabilities	450.00
Deferred revenue	3,000.00
Total liabilities	9,450.00
Common stock	60,000.00
Retained earningsSeptember's net income	2,550.00
Total equity	62,550.00
Total liabilities and equity	72,000.00

Both totals are 72,000.00. They agree because every entry that produced them agreed.

Northwind Traders, Inc. — as at 30 September 2026. USD.

Fig 11.1Balance sheet

Hover to fan · click to replayAssets $72,000.00 = liabilities + equity

The balance sheet on top of the set. Cash comes from the cash flow statement and retained earnings from the income statement, so assets equal liabilities plus equity by construction — nothing here is typed.

Assets are split into current — cash, and what will turn into cash or be used up within a year — and long-lived. Every liability Northwind has is a current liability, due within the year, so the total of $9,450 is all current. The classification is not cosmetic: it is what lets a reader ask whether next year's obligations are covered by next year's resources.

Where the profit went

Find $2,550 on that page. It is in equity, on the retained earnings line, and that is the whole connection between the two statements: the income statement measures a period, and its result is added to retained earnings, which is a balance. Northwind has no prior periods and has paid no dividends, so its retained earnings is September's net income. Next month it will be $2,550 plus October's result, less any dividend.

Retained earnings	September
Opening balance, 1 September	0
Net income for the month	2,550
Dividends declared	0
Closing balance, 30 September	2,550

The retained earnings roll-forward. Every later month starts from the line this one ends on.

In the ledger the transfer is a closing entry, normally made at year end: every revenue and expense account is emptied to zero and the difference lands in retained earnings, so the new year's P&L starts from nothing. Until then, most software computes the year's result and shows it on the retained earnings line for you. Had Northwind's year ended on 30 September, this is the entry:

Account	Debit	Credit
4000 Revenue	31,500
5000 Cost of revenue		17,000
6000 Payroll expense		8,400
6200 Rent expense		2,000
6300 Insurance expense		600
6400 Depreciation expense		500
6500 Utilities expense		450
3100 Retained earnings		2,550
Total	31,500	31,500

The closing entry, built from the adjusted trial balance. Revenue is debited to zero, each expense credited to zero, and the net income is the balancing credit to retained earnings.

Assets = liabilities + equity

After every entry — 30 September 2026

Assets72,000.00

Liabilities + equityLiabilities 9,450.00Equity 62,550.0072,000.00

$72,000 of assets, $9,450 of obligations, $62,550 of owners' claim. It balances because every entry made it balance.

Assets = liabilities + equity holds on the balance sheet because it held after every single entry that produced it. The statement does not make it balance; it reveals that it already did.

What the shape tells you

Reading	September	What it says
Working capital (current assets − current liabilities)	39,050	Comfortable — a current ratio of 5.1: obligations are covered several times over.
Cash as a share of assets	46%	Nearly half the balance sheet is cash, which is what a month-old company looks like.
Receivables	8,000	25% of the month's revenue is uncollected. Worth watching, not yet worth worrying about.
Inventory	1,000	$17,000 of the $18,000 bought has already sold. Either efficient or under-stocked — the next month tells you which.

Check yourself

Where does September's $2,550 of net income appear on the balance sheet?

Where this lesson's rules come from

Requirements, conventions and mechanics are three different things. These are the sources behind the requirements — and the ones marked as conventions are ours, not the standard-setters'.

ASC 210Balance SheetFree after registration
ASC 505EquityFree after registration
CON 8, Ch. 4, ¶E61Definition of equityFree to read
Regulation S-X, 17 CFR 210.5-02The balance sheet captions a registrant must presentFree to read

The full map is in US GAAP, and where these rules come from.

The words this lesson teaches

Each links to its definition in the glossary, where it also states the authority behind it and the components that render it.

In the founder glossary

The ideas in this lesson, explained for the founder who runs the company. Each has its own entry in the founder glossary.