We’ve discussed owner’s equity in I Own What? Travel Professionals and Owner’s Equity.
We’ve talked about liabilities in I Owe How Much?! Liabilities, Accounts Payable, and Travel Agents, and we’ve chatted about assets in Hey! When do I get paid? Travel Agents, Assets, and AR.
Exciting stuff I know, but having even a cursory understanding of those three things will help you to understand exactly what’s going on in your business:
Assets, Liabilities, and Owner’s Equity.
Those three things make up one of the staples of what we accountants call financial statements.
Financial statements are sets of reports in a specific format that offer information about an organization’s activities.
An official set of financial statements will include at a minimum: a balance sheet, an income statement, and a statement of cash flows, along with a set of written notes.
A balance sheet will list assets, liabilities, and equity at a certain point in time, generally the last day of the organization’s fiscal year.
What’s a fiscal year (haven’t we discussed that one before)?
Just in case we haven’t, a fiscal year is a 12-month period that corresponds to an organization’s business seasons or cycles. For almost all small businesses it will be the calendar year ending December 31st – so, don’t worry about fiscal years and just assume we accountants mean the calendar year unless we say otherwise.
The date of a balance sheet is important though, because (as I mentioned above) the amounts listed on a balance sheet are as of a specific date.
The amounts are not cumulative over a year but are only true on a certain day.
Accountants often say that the balance sheet is meant to show a snapshot of the organization at a single point in time. The other statements – income and cash flows – are meant to show performance over a specific period, normally a year.
Let’s review a bit:
What is an asset?
A thing an organization controls that brings value now and in the future. Cash is an asset. Accounts Receivable is an asset.
A building is an asset.
A piece of equipment is an asset.
What is a liability?
A liability is an obligation of an organization that will likely result in the transfer of assets to another party. A liability is at its most basic a debt.
An amount owed on a loan is a liability.
What is equity?
Remember our accounting equation:
Asset = Liabilities + Owners Equity
Which can also be stated:
Owner’s Equity = Assets – Liabilities
Owner’s equity is your claim, as an owner, on the assets of the business.
What does a balance sheet look like?
In the U.S., the balance sheet will list assets first, then liabilities, and then owner’s equity.
The most current or liquid assets (the assets that are most easily sold or converted to cash) are listed first. The liabilities due the soonest are listed first.
Here’s where that balancing thing comes into play:
The equation must balance.
Assets must equal liabilities plus equity.
Here’s an example:
Sunshine Travel has assets of $100,000 and liabilities of $70,000. Equity is $30,000. A simple Sunshine Travel balance sheet would look something like this:
Accounts Receivable $90,000
Total Assets $100,000
Loans Payable $70,000
Total Liabilities $70,000
Owner’s Equity $30,000
Total Equity $30,000
Now that we’ve mastered assets, liabilities, equity, and the balance sheet, in my next post we’ll start to discuss the fun stuff: income!
Of course, expenses come along with income and we summarize the whole thing in something called an income statement.
Stay tuned. Thanks so much for reading!
And don’t hesitate to reach out if you have any questions.