Assets, liabilities and equity are the three sections of the balance sheet. Assets are what the business owns, liabilities are what it owes to others, and equity is what remains for the owner once those obligations are settled. One rule ties them together and never changes: assets = liabilities + equity.
Once you understand assets, liabilities and equity, you can answer three questions every business owner asks. Can I meet my short-term obligations? How much of the business is funded by debt and how much by my own money? Is the value of my stake growing or shrinking?
In this guide we read the balance sheet of a hypothetical Saudi trading company line by line, then work out working capital and three quick ratios that give you a clear view of the financial position in about ten minutes.
Assets: What the Business Owns
Assets are resources the business owns or controls and expects to benefit from in the future, such as cash, stock, equipment and amounts due from customers. On the balance sheet they are grouped by how quickly they turn into cash.
Current Assets
Current assets are expected to be turned into cash or used up within one year or one operating cycle. The main ones are cash on hand and in the bank, trade receivables, inventory and prepaid expenses such as rent or insurance paid for the coming months.
These assets are the source of day-to-day liquidity. The larger the share held as cash or receivables due soon, the easier it is for the business to meet its obligations without strain.
Non-Current Assets
Non-current assets stay in the business for more than a year and are used in operations rather than sold. Examples include equipment, vehicles, furniture, shop fit-out and software. They are shown net of accumulated depreciation.
These assets do not convert to cash easily, so they should not be relied on to pay short-term obligations. Buying a delivery van for cash, for example, moves value from a current asset to a non-current one. Total assets stay the same, but liquidity falls.
Liabilities: What the Business Owes
Liabilities are present obligations the business must settle with cash, services or goods. They are also split into current liabilities, due within a year, and non-current liabilities, due later.
Current liabilities include amounts owed to suppliers, VAT payable to the Zakat, Tax and Customs Authority, accrued salaries, short-term loans and the part of long-term loans due this year. Non-current liabilities include long-term loans and the provision for employees’ end-of-service benefits.
Because liabilities come with payment dates, classifying them correctly matters more than their total. A SAR 1 million loan due in five years puts less pressure on cash than SAR 200,000 of supplier invoices due next month.
Equity: The Owner’s Share
Equity is the difference between assets and liabilities: what would be left for the owner or partners if the assets were realised at book value and all obligations were paid. It is made up of paid-in capital, retained earnings from previous years and the current year’s profit or loss, less any owner drawings.
Here is the balance sheet of a hypothetical trading company at 31 December:
| Line Item | Amount (SAR) |
|---|---|
| — | — |
| Cash on hand and at bank | 180,000 |
| Trade receivables | 240,000 |
| Inventory | 310,000 |
| Prepaid expenses | 20,000 |
| Total current assets | 750,000 |
| Equipment and vehicles (net) | 260,000 |
| Shop fit-out (net) | 90,000 |
| Total non-current assets | 350,000 |
| Total assets | 1,100,000 |
| Trade payables | 210,000 |
| VAT payable | 35,000 |
| Accrued salaries | 45,000 |
| Short-term loan | 110,000 |
| Total current liabilities | 400,000 |
| Long-term loan | 150,000 |
| End-of-service benefits provision | 70,000 |
| Total liabilities | 620,000 |
| Share capital | 300,000 |
| Retained earnings | 140,000 |
| Profit for the year | 40,000 |
| Total equity | 480,000 |
| Total liabilities and equity | 1,100,000 |
Both sides agree: 1,100,000 = 620,000 + 480,000. If your balance sheet does not balance, the error is in the entries, not the equation, and the first place to look is the trial balance.
How Equity Changes During the Year
Equity grows in two ways: the owner injects more capital, or the business earns a profit and keeps it. It falls with losses and with whatever the owner withdraws or distributes to partners.
In our example, if the owner withdrew SAR 30,000 in cash at year end, cash would fall by that amount and equity would drop to SAR 450,000, with the balance sheet still in balance. That is why drawings belong in a separate account rather than mixed with expenses, so profit is not understated and company money stays separate from the owner’s.
Also read: Trial balance analysis and error detection in an ERP system.
Working Capital: The Formula and What It Means
Working capital measures a business’s ability to fund its daily operations from short-term resources. The working capital formula is: working capital = current assets − current liabilities.
In our example: 750,000 − 400,000 = SAR 350,000. If the company paid every obligation due within the year from its current assets, it would still have SAR 350,000 left to fund purchases, payroll and growth.
Positive working capital does not automatically mean comfortable liquidity. If most of it is slow-moving stock or overdue receivables, the business can struggle to pay salaries even when the figure looks healthy. Always look at what makes up the number, not just the number.
Negative working capital means short-term obligations exceed short-term assets. It is a warning sign that calls for reviewing supplier terms, speeding up collections or moving part of the short-term debt to longer-term financing.
Three Ratios for a Quick Balance Sheet Read
Three ratios are enough for a first read of any balance sheet: the current ratio, the quick ratio and debt to equity. All three come straight from balance sheet figures.
| Ratio | Formula | In Our Example | What It Tells You |
|---|---|---|---|
| — | — | — | — |
| Current ratio | Current assets ÷ current liabilities | 750,000 ÷ 400,000 = 1.88 | SAR 1.88 of short-term assets for every riyal of short-term liabilities |
| Quick ratio | (Current assets − inventory − prepaid) ÷ current liabilities | 420,000 ÷ 400,000 = 1.05 | The company can pay without selling any stock |
| Debt to equity | Total liabilities ÷ total equity | 620,000 ÷ 480,000 = 1.29 | Creditors fund slightly more than the owner does |
There is no ideal ratio for every sector. A cash-based retail shop can run comfortably on a lower current ratio than a distributor that sells on credit. What matters is the trend from month to month and knowing why a ratio moved.
To read the balance sheet alongside the income statement and cash flow statement, see the three financial statements in plain language. If some of the terms are new to you, start with accounting principles for non-accountants.
A Live Balance Sheet in Daysum
In Daysum’s cloud system, built on Odoo, every sales or purchase invoice and every receipt or payment posts to the accounts as it happens, so the balance sheet is available on any day without waiting for month-end close.
You can open any line on the balance sheet and drill into it: from receivables to the aged balance of each customer, from inventory to items and quantities, from VAT payable to the invoices behind it. This depends on a well-organised general ledger, as explained in how Odoo and Daysum help manage the general ledger, and on the management reports covered in ERP reports for business decisions.
If you would rather see your balance sheet this way than in a spreadsheet updated once a quarter, talk to the Daysum team for a short walkthrough on a setup close to your business.
Conclusion: The Balance Sheet in a Business Owner’s Language
The balance sheet is a snapshot of your business at a point in time: what it owns, what it owes and what belongs to you. Compare current assets with current liabilities to judge liquidity, compare debt with equity to see who funds the business, and track working capital month by month.
The more current your figures are, and the easier they are to trace back to their source, the more your decisions on buying, expanding and borrowing rest on facts rather than estimates. If you want to review how your balance sheet is prepared or get it in real time, contact the Daysum team.
FAQs About Assets and Liabilities
Assets are what the business owns or controls and expects to benefit from, such as cash, stock, equipment and receivables. Liabilities are what the business owes to others, such as suppliers, loans and tax payable. The difference between the two is equity.
Working capital = current assets − current liabilities. If current assets are SAR 750,000 and current liabilities are SAR 400,000, working capital is SAR 350,000. It measures the business's ability to fund daily operations from short-term resources.
It means obligations due within a year are larger than the assets that will turn into cash over the same period. It signals pressure on liquidity and calls for faster collections, renegotiated payment terms or moving some debt to long-term financing. It can be acceptable for a while in businesses that sell for cash and buy on credit, provided sales are fast and steady.
Yes, the end-of-service benefits provision is an obligation to employees and appears under liabilities. It is usually classified as non-current, except for the part expected to be paid within a year. The provision is updated regularly as salaries and years of service change.
Every transaction is recorded with a double entry that affects two equal sides, so assets always equal liabilities plus equity. If the balance sheet does not balance, an entry is missing or recorded incorrectly. The search usually starts with the trial balance and reconciling the main accounts.
