Q & A : equity numbers on the balance sheet

Welcome to the first edition of Friday Q&A!

Alexia asks:

Q: I’d like to get a better understanding about the Equity numbers on the balance sheet.

What is the Equity section on the Balance Sheet?

A: The Equity shows the flow of money in and out of the business, including from the owner(s).

• Owner’s Equity is the net effect of:
  • Owner’s Draw is money you have taken out of the business or used business money on personal purchases.
  • Owner’s Contribution is money you have put into the business or used personal money on business expenses.
• For companies, such as S-Corps, Corporations, and Partnerships, the Owner’s Equity is instead called Shareholder or Partner Contributions and Distributions, respectively.
• Retained Earnings is a roll up of the Net Income from the Income Statement from the prior year.
• Current Year Earnings is the Net Income (bottom line) on the Income Statement for the current year.
• Stocks and Shareholder Benefits are also in the Equity section for large companies.

The Net Income from the Balance Sheet is the Net Total of Sales Income minus Cost of Goods Sold minus Expenses. Therefore, the Net Income is an important component of Equity because it is the total of money coming in and going out of the business.

The other components of the Balance Sheet are Assets (what you own, like Cash in the Bank and Inventory on Hand and Available for Sale), and Liabilities (what you owe, like a balance on a Credit Cards and Sales Tax Collected from Customers and not yet remitted).

Assets – Liabilities = Equity

Therefore, if Equity pulls in all of what you have contributed or drawn from the business personally, plus all the money the business has received from sales and spent on goods sold and operating expenses, then the difference is what? Bingo!! Assets – Liabilities! Whatever you have left in the bank, or owed to you, as well as what you owe if you have paid some of those expenses on credit, for example.

Note, Income Statement and Profit & Loss Report are the same thing with different names.