How to read a balance sheet

Q: What is the difference between a balance sheet and a P&L?

The P&L shows income and expenses over a period. The balance sheet shows assets, liabilities and capital on one date.

Q: Why does closing stock affect both the P&L and the balance sheet?

Closing stock reduces cost of goods sold in the P&L and is shown as an asset on the balance sheet on the same date. A wrong stock figure therefore changes both profit and assets.

A balance sheet is a snapshot of what the business owns and owes on one date. Liabilities and capital on one side, assets on the other, and the two sides always add up to the same figure.

Updated 2026-11-054 min read

Who this is for

Owners of trading businesses
Proprietors and partners
Businesses with a CC or OD limit
First-time readers of accounts
Accountants briefing owners

On this page 12

The one idea behind every balance sheet

Everything the business has (assets) came from somewhere: the owner's money (capital), money borrowed (loans) or money not yet paid to suppliers (creditors). So:

Assets = Capital + Liabilities

Where the P&L covers a period, the balance sheet is a single date — usually 31 March, but you can draw one on any day.

A worked example: a building-materials trader on 31 March

Liabilities and capital	₹	Assets	₹
Capital account (opening + profit − drawings)	42,00,000	Fixed assets (vehicle, godown racks, computers) net of depreciation	14,00,000
Bank CC / OD limit	25,00,000	Closing stock	38,00,000
Vehicle loan	6,00,000	Sundry debtors	41,00,000
Sundry creditors	22,00,000	Cash and bank	3,50,000
Duties and taxes payable (GST, TDS)	2,50,000	Advances and deposits	1,00,000
Total	97,50,000	Total	97,50,000

Reading the liabilities side

Capital account: what the owner has put in plus profits kept in the business, minus drawings. If drawings exceed profit year after year, capital shrinks even when the business is profitable.
Bank CC/OD: a working-capital loan secured on stock and debtors. A balance close to the full limit all year is a warning sign.
Term loans: vehicle or machinery loans. The part due within 12 months is a near-term cash commitment.
Sundry creditors: what you owe suppliers. ₹22,00,000 against yearly purchases of, say, ₹2.2 crore means you take about 36 days to pay.
Duties and taxes: GST and TDS collected but not yet paid. This money is not yours.

Reading the assets side

Fixed assets: long-life items at cost less depreciation.
Closing stock: ₹38,00,000. Ask how much is older than six months. Dead stock on the balance sheet is cash you cannot use; see inventory turnover and dead stock.
Sundry debtors: ₹41,00,000 — the largest asset here. If yearly sales are ₹2.5 crore, customers take about 60 days to pay while suppliers are paid in 36. That gap is funded by the CC limit.
Cash and bank: only ₹3,50,000. Profit is fine; liquidity is tight.
Advances and deposits: rent deposits, supplier advances. Check that old advances are actually recoverable.

Simple checks an owner can do in five minutes

Check	How	In the example
Current ratio	(Stock + Debtors + Cash + Advances) ÷ (Creditors + CC + Taxes payable)	83,50,000 ÷ 49,50,000 ≈ 1.7
Debtor days	Debtors ÷ Sales × 365	About 60 days
Creditor days	Creditors ÷ Purchases × 365	About 36 days
Debt to capital	(CC + Loans) ÷ Capital	31 ÷ 42 ≈ 0.74

No single ratio is good or bad on its own; watch how each one moves year to year. Banks look at the same numbers when renewing limits — see the business loan documents checklist.

What the example business should do next

Put the checks together and a story appears. The trader is profitable and the capital base is healthy, but cash is thin because customers take about 60 days while suppliers are paid in about 36. The CC limit fills the gap.

Three practical moves follow from this balance sheet:

Bring debtor days down. Collecting just 10 days faster on ₹2.5 crore of yearly sales frees up roughly ₹6,80,000 — more than the cash in the bank today. Start with the oldest bills in the ageing report.
Look inside the stock figure. If ₹6,00,000 of the ₹38,00,000 is slow-moving tiles or cement past its best, clear it at a discount rather than funding it with interest-bearing CC money.
Watch drawings. If the owner draws more than the year's profit, capital shrinks and the bank sees a weaker business at renewal.

Read the balance sheet alongside the P&L for the same year: one shows the result, the other shows where that result is sitting.

Why the balance sheet doesn't tally

In Tally the two sides always match because every voucher has a debit and a credit. When owners say the balance sheet is wrong, it usually means a balance is wrong: a difference in opening balances, entries in a suspense ledger, or stock not updated. Start with the trial balance to find which ledger is off.

Checking the balance sheet with Cashflow OS

Cashflow OS syncs the Balance Sheet from Tally so you can open it on your phone or in the web app for any date range or financial year. Tap through to ledgers to see live balances, and open bill-wise outstanding with ageing to understand what sits inside sundry debtors and creditors. Export to Excel or PDF when the bank or your CA asks. If you have more than one Tally company, switch between them in the same account. See financial reports.

Avoid these

Common mistakes

MistakeReading only the totals
Do this instead
The totals always match. Look inside debtors, stock, the CC balance and drawings, line by line, and compare with last year.
MistakeTreating GST and TDS payable as your money
Do this instead
Duties and taxes on the liabilities side are owed to the government. Keep that cash aside for the due dates.
MistakeIgnoring old stock and old advances
Do this instead
Ask how much stock is older than six months and whether old supplier advances are recoverable; both can overstate the business.
MistakeDrawing more than the year's profit
Do this instead
Compare drawings with profit in the capital account. If drawings are higher year after year, capital shrinks and banks notice at renewal.

Keep handy

Checklist

How to read a balance sheet — 8 checks. Tick them as you go.

Capital account worked out: opening + profit − drawings
CC/OD balance checked against the sanctioned limit through the year
Debtor days worked out from sundry debtors and yearly sales
Creditor days worked out from sundry creditors and yearly purchases
Closing stock checked for slow-moving and damaged items
Duties and taxes payable matched with GST and TDS returns
Old advances and deposits reviewed for recovery
This year's figures compared side by side with last year's

In Cashflow OS

How Cashflow OS helps

Cashflow OS puts your TallyPrime books on every phone in the team. Where it fits this topic:

Balance Sheet from Tally on your phone

The Balance Sheet syncs from your TallyPrime company and opens on phone or web for any financial year or date range; tap through to ledgers to see live balances.

See Financial reports from Tally

See what sits inside debtors

Bill-wise outstanding with ageing shows which customers make up sundry debtors and how old their bills are, so you know where to start collecting.

See Outstanding receivables

Questions people ask

What is the difference between a balance sheet and a P&L?

The P&L; shows income and expenses over a period. The balance sheet shows assets, liabilities and capital on one date.

Why does profit go into the capital account?

Profit belongs to the owner, so for a proprietorship or partnership it is added to the capital account. For a company it goes to reserves.

Is a high debtors figure bad?

Not by itself, but compare it with sales. If debtor days rise year after year, more of your money is stuck with customers.

Can I see a balance sheet for a date other than 31 March?

Yes. Tally can produce a balance sheet as on any date, though stock and adjustments may not be updated mid-year.

What is a good current ratio for a small business?

There is no single right figure; it depends on the trade. The trend matters more: a ratio falling year after year means short-term dues are growing faster than the assets that pay them.

Where does the CC limit appear on the balance sheet?

The amount used under a cash credit or overdraft limit appears as a bank loan on the liabilities side. The unused part of the limit does not appear at all.

Why does closing stock affect both the P&L and the balance sheet?

Closing stock reduces cost of goods sold in the P&L; and is shown as an asset on the balance sheet on the same date. A wrong stock figure therefore changes both profit and assets.

Who reads my balance sheet besides my CA?

Banks read it when sanctioning or renewing limits, and large suppliers or buyers may ask for it before giving credit. Keep it consistent with what you file.

This page is general information for Indian businesses, not tax, legal or financial advice. Rules and rates change — check the official portals or your CA before acting.