Your P&L tells you what you earned over a stretch of time. Your balance sheet tells you what you have and what you owe at a single moment: a snapshot, not a story.
Assets
6 line itemsWhat your shop owns, or is owed.
Money in your business bank account. Should match your reconciled bank balance exactly.
Money customers have paid through Square, Stripe, PayPal or similar that hasn't transferred to your bank yet. Each platform gets its own clearing account, and each should match what the platform dashboard shows.
Money customers owe you for completed work they haven't paid for. On cash basis there's no receivable at all. Revenue records when the money arrives. Even on accrual, most repair shops collect at pickup, so this stays small or zero.
The value of retail items or parts stock you're holding. Only appears if you're actively tracking inventory. Many small shops don't.
Big-ticket tools and equipment, listed at cost and then reduced by depreciation over time. Most guitar repair tools don't cost enough to land here. A $200 soldering station is just an expense. The threshold where something starts getting tracked as a fixed asset usually falls around $500–$2,500, depending on your preference and your tax accountant's guidance. A spray booth, a CNC router, a Plek station: balance sheet. Your everyday hand tools: not.
A running total of how much your equipment has been depreciated. A negative number that reduces the value of your fixed assets. The other side of this entry is Depreciation Expense on your P&L, generally used at year end, with the numbers prepared by your tax preparer.
Use clearing accounts to keep the money organized
Money a customer paid through Square, Stripe or PayPal is yours the moment they pay, but it isn't in your bank yet. A clearing account is where it sits in between, and it's the account most repair shops don't have.
It matters because that payment isn't one number. There's your revenue, the sales tax you collected on the state's behalf, and the processor's fee. A clearing account is where those three get separated at the source, so the state's money never lands in your income and your fees don't disappear into the gap between what a customer paid and what hit your account.
The balance should match what your platform dashboard says. If it doesn't, a transfer wasn't recorded, and you'll know before month-end rather than during cleanup.
Liabilities
6 line itemsWhat your shop owes, including money that was never yours to begin with.
Money you owe vendors you have terms with, where the invoice is outstanding. On cash basis the expense isn't recognized until you pay, so nothing sits in a payable. Even on accrual, plenty of small shops have no terms with anyone: every order goes on a credit card when it's placed, and this account stays at zero. A card charge is different: that expense counts when charged, but the balance owed is still a real liability (see Credit Card Payable).
Money customers have paid toward work you haven't finished. You owe them either the work or the money back, so it's a liability until the job is done. Worth knowing: this is where your tax basis and your management books can part ways. On cash basis, a deposit is generally taxable income when you receive it, even though the work isn't done. That doesn't make it yours to spend. Track it as a liability so you can see what portion of your cash is already committed, and let your tax pro handle how it's reported.
The instrument owner's share of a consignment sale, from the moment the item sells until you pay them. Only your commission is revenue. This is the rest of the money, and it was never yours. Clears when you cut the check.
Sales tax you've collected from customers but haven't remitted yet. This is the state's money, not yours. Don't spend it. Worth checking monthly: this balance should drop by exactly what you paid your jurisdiction's Department of Revenue. If it doesn't line up with your filings, either something is off in how tax has been recorded, or it hasn't actually been remitted. A balance that only ever grows means nobody's been paying it, and that compounds quietly until it's a very expensive problem.
Balance owed on business credit cards used for shop expenses. If you carry a balance, the finance charges are Interest Expense on your P&L. The payment itself just reduces this liability.
Any outstanding business loans: equipment financing, SBA loans, and so on. Remember a loan payment splits two ways: the principal reduces this balance, the interest is an expense on your P&L.
Equity
4 line itemsWhat's left when you subtract what you owe from what you own. This part is yours.
Money you've put into the business: initial investment and any later capital contributions.
Money you've taken out. For a sole prop or single-member LLC this is how you pay yourself, not as a salary expense, but as a draw that reduces equity.
Cumulative net income or loss from all prior periods. The business's running score since inception.
Your current-year profit or loss, pulled from the P&L. At year-end it rolls into Retained Earnings.
Balance sheet or P&L?
They tell different stories. Read both every month.
Need help applying this to your shop?
I can help you set things up correctly, whether that's your chart of accounts, your sales tax compliance, or your bookkeeping workflow.