How to Read Your Balance Sheet and Income Statement in 10 Minutes

By Di Ma, Project Manager 29 OCT 2026 · 4 MIN READ

You don't need to be an accountant to get the important answers out of your own accounts. Two statements tell you most of what matters: the income statement (also called the profit and loss account) and the balance sheet. Here's how to read them, using a real set of books, the demo company in the Certanta portal, as the example.

The income statement: how the period went

The income statement covers a period, a month, a quarter or a year, and reads from top to bottom:

Sales (revenue): what you invoiced in the period, whether or not it's been paid.
Cost of goods sold: the cost of what you sold.
Gross profit: sales less cost of goods sold. This tells you whether your pricing works.
Expenses: rent, salaries, freight, professional fees, depreciation and the rest.
Profit for the period: what's left.

The Certanta client portal, income statement of the fictional demo company Harbourfront Trading Ltd for 1 January to 30 September 2026: sales HKD 3,769,965, cost of goods sold HKD 2,237,825, gross profit HKD 1,532,140, expenses including rent and rates HKD 256,500 and staff salaries and MPF HKD 558,565, and profit for the period HKD 572,035. — The demo company's income statement for the nine months to 30 September: HK$3.77 million of sales, HK$1.53 million gross profit, HK$572,035 profit.

Profit isn't cash. Sales count when invoiced and costs when incurred, which is why a profitable month can still leave the bank balance lower (see accrual vs cash).

The balance sheet: where things stand

The balance sheet is a snapshot at a date: what the company owns, what it owes, and what's left for the owners.

Assets: non-current (equipment, less depreciation) and current (receivables, bank balances, cash, inventory, prepayments).
Liabilities: what the company owes, such as suppliers, accrued costs, the director's current account, loans and tax.
Equity: share capital, plus profits kept in the business over the years (retained earnings), plus this period's profit.

It always balances: assets = liabilities + equity. In the demo company, HK$2,281,426 of assets = HK$682,020 of liabilities + HK$1,599,406 of equity.

The Certanta client portal, balance sheet of the fictional demo company Harbourfront Trading Ltd: office equipment at cost less accumulated depreciation, trade receivables HKD 357,225, Hang Seng Bank HKD current HKD 1,297,140.55, USD savings HKD 347,920, petty cash, inventory HKD 168,500, prepayments and deposits; accrued charges, trade payables HKD 497,520 and the director current account under current liabilities; and equity of share capital, retained earnings and profit for the period, with total assets equal to total liabilities and equity of HKD 2,281,425.55. — The demo company's balance sheet: what it owns and owes, and the equity that makes the two sides agree.

How the two connect

The period's profit from the income statement appears in the balance sheet's equity. Every sale not yet paid sits in receivables; every bill not yet paid sits in payables. That's why the two statements have to be read together: profit tells you whether the business is working, the balance sheet tells you whether it can pay its way.

Six numbers to check every month

Six numbers to check, worked on the demo company (1 January to 30 September 2026)
Check	Calculation	Demo company
Gross marginwhat's left of each dollar of sales after the cost of the goods	Gross profit ÷ sales	40.6%1,532,140 ÷ 3,769,965
Net marginwhat's left after all costs	Profit ÷ sales	15.2%572,035 ÷ 3,769,965
Cash	All bank and cash balances	HK$1,649,261
Current ratiocan short-term assets cover short-term debts?	Current assets ÷ current liabilities	3.252,216,986 ÷ 682,020
Debtor dayshow long customers take to pay	Receivables ÷ sales × days in the period	about 26 days357,225 ÷ 3,769,965 × 273
Creditor dayshow long you take to pay suppliers	Payables ÷ cost of goods sold × days	about 61 days497,520 ÷ 2,237,825 × 273

No single number is "good" or "bad" on its own. What matters is the trend from month to month, and how it compares with your terms and your industry. For the demo company: customers pay in about 26 days while it takes about 61 days to pay suppliers, which is comfortable for cash. Strong cash and a current ratio above 3 mean no short-term pressure.

One caution in these figures: the demo company counts its stock only at the year end, so until then cost of goods sold equals purchases and the gross margin assumes stock didn't change. Many small companies work this way; just read mid-year margins with that in mind (see inventory and stocktake).

Warning signs

Gross margin falling month after month: costs rising faster than prices, or discounting.
Debtor days creeping up: customers paying later, and cash tied up (see bad debts).
Profit up but cash down for several months: growth eating cash, or something not being collected.
A current ratio below 1: more due in the short term than you hold in short-term assets.
Lines you can't explain, such as a "suspense" or "sundry" balance that keeps growing.

How Certanta helps

Live statements in your portal, from entries your bookkeeper has posted, with every line opening the entries behind it.
A monthly management pack you can forward to your directors or bank (see the management pack).
Ask about any figure. "Why was rent higher in March?" is a question for the AI assistant in your portal, answered from your posted books.

Frequently asked questions

What is the difference between a balance sheet and an income statement?

The income statement covers a period and shows sales, costs and profit. The balance sheet is a snapshot at a date and shows what the company owns (assets), what it owes (liabilities) and what is left for the owners (equity).

Why doesn't my profit match my bank balance?

Because profit counts sales when invoiced and costs when incurred, while the bank balance moves only when cash is received or paid. Unpaid invoices, unpaid bills, stock and equipment purchases all create differences.

What is a good gross margin?

It depends on the industry. What matters most is the trend: a gross margin that falls month after month means costs are rising faster than prices, or discounting is eating into sales.

How do I calculate debtor days?

Divide trade receivables by sales for the period and multiply by the number of days in the period. For example, receivables of 357,225 and sales of 3,769,965 over 273 days give about 26 days.

What does a current ratio tell me?

Whether short-term assets (cash, receivables, stock, prepayments) cover short-term liabilities (suppliers, accruals and other amounts due within a year). Below 1 means more is due soon than the company holds in short-term assets.

How often should I look at my financial statements?

Monthly. A monthly look at margins, cash and debtor days catches problems while they are still small.

Read your own figures, every month

Certanta keeps your statements current in your portal, with a monthly management pack and an AI assistant you can ask about any figure. Open the demo and try these six checks yourself.

Open the demo See pricing

This article is general information about reading financial statements, not accounting or investment advice. Figures are from the fictional demo company, Harbourfront Trading Ltd. What counts as a healthy figure depends on your industry and business.