A balance sheet review small business owners actually finish takes five minutes and five checks. Cash ties to the bank statement. No account shows a negative balance. Undeposited Funds and the other clearing accounts are at zero. Liabilities move the right way: sales tax matches the return, payroll liabilities clear after each deposit, loans go down. And equity shows owner draws and contributions, not expenses and income. Pass all five, and the profit and loss is worth reading. Fail one, and it is not.
This guide is for owners who keep their own books in QuickBooks Online or Xero and open the profit and loss every month without ever opening the balance sheet. That is most DIY owners, and it is why the balance sheet is where their errors live. You will learn what each line should look like, the five checks in order, what each failure usually means, and the two California lines that national guides skip. It is the first thing we do on every client close at Books LA.
Why the balance sheet review comes before the P&L
The profit and loss tells you whether you made money. The balance sheet tells you whether that number is true. Every bookkeeping error that inflates revenue or hides an expense leaves a mark on the balance sheet. A deposit counted twice sits in Undeposited Funds. Then a sales tax payment coded to expense leaves the liability growing, and a transfer booked as income leaves cash that does not tie. The P&L cannot show any of that. So the monthly reports routine reads the balance sheet first, and the DIY bookkeeping checklist puts four of its twelve checks here.
The balance sheet review: five checks in order
| Check | What right looks like | What a failure usually means |
|---|---|---|
| 1. Cash ties | Every bank and card balance equals the reconciled statement balance | Unreconciled month, duplicate account from a feed reconnect, or a transaction booked to the wrong account |
| 2. No negatives | No negative cash, receivables, payables, or inventory; no loan that went up | Something booked backwards: a payment entered twice, a bill paid without the bill, a refund as a sale |
| 3. Clearing accounts at zero | Undeposited Funds, Opening Balance Equity, “Ask my accountant,” suspense all zero | Income counted twice, an unfinished setup, or coding questions nobody answered |
| 4. Liabilities move the right way | Sales tax payable equals the return; payroll liabilities clear after deposits; loan balances match the lender | Tax payments coded to expense, or interest and principal not split |
| 5. Equity is only equity | Owner draws and contributions, plus retained earnings from last year. Nothing else | Personal spending in expenses, owner deposits in revenue, prior-year entries changed |
Check 1: cash ties to the bank
Open the balance sheet as of the last day of the month. Each bank and credit card line should equal the ending balance on that account’s statement, after reconciliation. A card balance on the balance sheet is a liability and should match the statement balance owed. If a line is off by $1 or by $10,000, stop. Nothing else on either report means anything until it ties. Our reconciliation guide covers the three reasons it does not, and Intuit’s own reconcile article has the screens.
Check 2: no negative balances
Negative cash means the books hold transactions the bank never saw, or the opening balance is wrong. Negative accounts receivable means someone entered a customer payment with no invoice, so the software thinks you owe them. Then accounts payable is the mirror: a bill payment with no bill. Negative inventory means sales went in before purchases. A loan balance that rose means a payment hit the wrong account or a deposit landed in the loan. Each one is backwards somewhere, and the register for that account shows where.
Check 3: clearing accounts at zero
Undeposited Funds is the big one. When you receive a payment against an invoice and then add the bank deposit from the feed as new income, the sale counts twice and the first copy sits here forever. The balance should be zero or only the last few days of unmade deposits. Opening Balance Equity should be zero after setup is finished. “Ask my accountant” and suspense are parking lots, and by month-end they are empty. A growing balance in any of these is the bookkeeping equivalent of a check engine light.
Check 4: liabilities move the right way
Three liabilities tell the truth about the month. Sales tax payable should equal the tax collected since the last return. After the CDTFA payment it should drop to the new period’s collections. A balance that only grows means the payment went to expense. Our sales tax bookkeeping guide explains the setup. Payroll liabilities should be close to zero right after each EDD and IRS deposit, holding only the latest payroll’s withholding. Loan balances should match the lender’s statement and go down each month by the principal portion, with interest in expenses. If they do not, someone posted the payment in one piece.
Check 5: equity is only equity
Equity has three honest residents: owner contributions, owner draws or distributions, and retained earnings carried from the prior year. If the retained earnings figure changed from what the CPA’s return showed, someone edited or deleted a prior-year transaction. That is the first question the CPA will ask in January, and the CPA handoff post explains the tie-out. If draws are small and expenses are large for a business that pays its owner, personal spending is probably in expenses. The fix is a reclass, and the prevention is one business card used for nothing else.
The two California lines
Sales tax payable on a Los Angeles balance sheet carries district tax. So the figure should match the CDTFA return by district, not just in total. Payroll liabilities should show the EDD side, SDI and PIT withheld, separately from federal. The DE 9 is the quarterly tie-out for one and the 941 for the other. Our California payroll taxes post shows the four-part entry that keeps them apart. Both lines are what the city business tax renewal and a CDTFA audit will test, which is why the Q4 bookkeeping checklist repeats them.
How Books LA handles this
We run these five checks on every client file before the profit and loss goes out, every month. When one fails, we fix the entry and note what it was, so the same error does not come back. The balance sheet we send has already passed. That is what makes the P&L note worth reading. If your balance sheet has never had this review, a $495 bookkeeping review will show what it is carrying. Our Los Angeles bookkeeping services guide explains the monthly service around it.
Frequently asked questions
What should I look for when reviewing a balance sheet?
Five things. Cash that ties to the bank statements, no negative balances, clearing accounts at zero, liabilities that match the returns and go down after deposits, and equity that holds only owner contributions, draws, and retained earnings. Each failure points to a specific bookkeeping error.
Why is my balance sheet cash different from my bank balance?
Usually timing, if the account is reconciled: outstanding checks or deposits in transit. If the account is not reconciled, the difference is a duplicate, a missing transaction, or a transaction in the wrong account. Reconcile first. The reconciled balance is the only one worth comparing.
What does a negative balance on the balance sheet mean?
Something went in backwards. Negative receivables mean a payment without an invoice, negative payables a payment without a bill, negative cash transactions the bank never saw. Open the account’s register and find the entry that pushed it below zero.
Should Undeposited Funds ever have a balance?
Only payments received in the last few days that have not yet reached the bank. Anything older means a deposit went in separately from the payment and income counts twice. Match the deposit to the payment, or delete the duplicate deposit, then reconcile.
How often should a small business review the balance sheet?
Monthly, after every account is reconciled and before the profit and loss is read. Two minutes for a clean file. The first review of a file that has never been checked takes longer, because it finds everything the earlier months missed.
What is retained earnings and why did it change?
Retained earnings is the accumulated profit from prior years, carried forward. It should match what the CPA’s last return showed. If it changed, someone edited, deleted, or added a prior-year transaction after the return went in, and the CPA needs to know before the next return.
Which balance sheet lines does the CDTFA or EDD care about?
Sales tax payable, which should equal the tax collected and tie to the filed return by district, and payroll liabilities, which should clear after each EDD and IRS deposit and tie to the DE 9 and 941 each quarter. Both agencies test the books against the returns.
If your balance sheet has a line you cannot explain, book a short call and we will read it with you.
This post is general information. Books LA provides bookkeeping services and does not advise on income tax. Questions about the tax treatment of equity, loans, or depreciation belong with your CPA.
