This is the
3 in a series of posts that have the aim of helping you, the
business owner, to better understand your Balance Sheet so that you can use it
to work for your business.
Make Up We are
currently looking at the different categories of accounts that make up the
Balance Sheet. The last two posts explained the Assets category of accounts and
then the Liabilities categories of accounts that can be found on the Balance
Sheet. In this post we will be looking at the final category of accounts that
can be found on a Balance Sheet – Equity. Equity
The Equity
category of accounts effectively make up the “other side” of the Balance Sheet:
Assets – Liabilities = Equity The Equity
represents the money that has been invested in the business and can be shown across
several different types of accounts:
We will
look at each of these in turn.
Retained Earnings/Profit This
account represents the net value of Profits less Losses from previous years’
worth of accounts after taxes and, for companies, dividends have been paid.
Effectively the profit has been retained by the business in order to continue
to help finance the business. For
businesses using a computerised accounting system, when the year-end accounts
are ‘rolled’ over, all the “Profit and Loss” accounts are cleared of their
balances, and the net balance of these accounts gets posted to the Retained
Earnings/Profit account.
Shares (Companies Only)
Whatever
the size of an incorporated company, whether it be a small sole owner company
or a large multinational company listed on a stock exchange, there will be
shares, the value of which will be represented by share accounts on the Balance
Sheet.
Share
accounts on the balance sheet represent the value that an owner of a business,
whether one owner or multiple owners, have invested in the business. In general,
unless a business is expanding, and alters its share structure in order to
release more shares to obtain more investment income, then the book value of
the shares shown on the Balance Sheet should remain the same. (Market value of publicly
listed shares is of course another matter).
Owner Current Accounts Owner
current accounts are usually only seen on the Balance Sheets of smaller
privately owned businesses. As with shares these accounts represent the monies
that owners have put into a business. However, unlike shares, these accounts
can fluctuate in value on a regular basis. Owners may invest funds into the
business in order for the business to pay costs etc., but then, when the
business is making money and can pay its own costs the owners may choose to withdraw
some of their funds. As long as
the current accounts remain in credit, i.e. more money has been put in then
taken out, the drawings by an owner are seen as just that (withdrawing own
money) and are not taxed. However, once an owner withdraws more money than they
originally put in the drawings are then seen to be a salary and are taxed
accordingly. This then
completes our look at the types of accounts that make up a Balance Sheet. In
the next post we will look at Control Accounts on the Balance Sheet.
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