Whether you’ve been asked by another professional or you just want to know for yourself, it important to know where to find this information.
However, before we go too far, let’s back up and talk about what equity IS.
Equity is one-third of the accounting equation, which is Assets=Liabilities + Equity.
In order to understand this, think about it in terms of buying a $100,000 house with 20% down. This means that you will pay $20,000 up-front to the bank, and the bank will issue you a loan for $80,000. The house is your asset, the loan is your liability, and the down-payment is your equity. Your accounting equation would look like this: 100,000=80,000 + 20,000. As you pay back the loan, the liability will decrease and the equity will increase.
Now it’s time to translate that knowledge to your business. Your bookkeeper/accountant should run a report called the Balance Sheet. A Balance Sheet is a detailed version of the accounting equation for your business. Its headings actually reflect the categories of the accounting equation, as shown below:
Download the example here: Demo Company (US) – Balance Sheet
Assets
In the Assets section, the business’s checking accounts are listed first. If the company had them, land, computers, buildings, and other large items would be listed. Accounts such as Accounts Receivable (which shows money owed to the business that customers have not paid yet) would also be included here.
Liabilities
In the Liabilities section, it shows what the business owes. Any loans would be shown here, as well as Accounts Payable (which shows money that the business owes to other businesses, like outstanding invoices.)
Equity
Finally, we arrive at Equity. The Equity section will show you what the Current Year Earnings are for the business, brought over from the current year’s Income Statement (find out how to read your Income Statement here). Retained Earnings is another account shown in Equity, which is compiled of information from past year’s Income Statements.
(It’s important to note here that when you view the Balance Sheet, you’re viewing information from the beginning of using the accounting software to whatever date you chose when you ran the report, such as Dec. 31, 2016 in this example. The Income Statement gets closed out every year and those numbers are then transferred to Retained Earnings. When you view the Income Statement, you always have to choose a “From” and “To” date for the information you want to view.)
Understanding how much Equity that you have in your business is one of the vital aspects of knowing the overall health of your business. If you don’t currently have a bookkeeper or are looking to make a change, I am open to new clients. I run a Balance Sheet and Profit and Loss report for my clients every month. (Find out how to read your Profit and Loss report here.)
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Blessings,
Valerie Johnston