The Virtual CFO

Balance Sheet – Owners Equity

The Owner’s Equity (sometimes called Shareholder’s Equity) represents the assets of the company that the owners and/or shareholders own. You calculate the owner’s equity by subtracting your company’s total liabilities from all of the assets (i.e., total assets – total liabilities = owner’s equity).

The owner’s equity section of the balance sheet for small business generally includes:

• Capital Stock - the cash and assets you contributed to start your business.
• Retained Earnings - earnings that have not been distributed to the owners.

(Note: S Corporations, partnerships, and LLCs do not normally have retained earnings; rather they have what is called “basis”, which is each owners/partners share of the company’s assets)

Balance Sheet – Long-Term Liabilities

The long-term liabilities section of the balance sheet shows the obligations your company has that will take longer than a year to pay. As I stated in my previous post, the short-term portion (due in less than a year) of long-term payables are reported in the current liabilities section of the balance sheet.

Some of the most commonly used categories of long-term liabilities include:

• Notes Payable – obligations to pay for equipment, land, buildings, etc.
• Deferred Income Tax – taxes you owe, but are legally ably to defer into future years.
• Lease Obligations – capital leases (put simply, a lease that resembles a purchase) are required to be reported as long-term liabilities.

Balance Sheet – Current Liabilities

The current liabilities section of the balance sheet shows the obligations that your business will be paying in a year or less. As with the current assets section of the balance sheet, the current liability categories are listed in order of liquidity.

Below is a list of the typical liability categories, in order of liquidity:

• Accounts Payable – invoices your company incurs for day-to-day operational and general and administrative expenses.
• Current Income Tax Liabilities – payroll taxes and taxes due for the owners of your company.
• Short-Term Part of Loans and Notes Payable – in financial statements, loans are divided into two categories: (1) short-term balance due (due in next year), and (2) long-term balance due (balance due in more than a year).
• Other Current Liabilities – these are other obligations your company has, that are due in less than a year, that do not fit into the other short-term liability categories.