Balance Sheet: Owner’s Equity

Video #8

Transcript

OK, final piece of the balance sheet is owner’s equity, which appears at the very bottom and consists of several lines, but at the very least two lines:

  1. Common stock, which is the amount of money that shareholders have invested in the company. In a small business, this is typically the amount that the founder put in when they first started the company.
  2. Retained earnings are the total of all the profits and losses for the company since the company began, up until today.

So let’s put a couple of numbers in here. Common stock — let’s say that the founder put in $5,000 back a couple of years ago. Let’s say that the retained earnings, the total of all the losses and the profits since the company began were $70,500. So we put a line there and we’ll now total all of the items in owner’s equity, which would be $75,500.

But we’re not done yet, because remember that we had a total liabilities in the previous video of $115,500. So we’re going to add that to the $75,500 and we’re going to end up with a subtotal of $191,000 even. We’ll double-underline that ($191,000). And you may recall that $191,000 is exactly the same as the total of the assets.

Let me put this altogether now so you can see the big picture. Ok, the balance sheet is sometimes also shown as a two-sided statement with assets on one side and liabilities on the other like this. Alright, to finish this off — a really fast recap:

On the left, the assets, divided into current and long-term assets and this number ($16,000) is equal to cash, AR plus inventory. Building and machinery down here ($150,000 and $25,000) subtotals to $175,000. And then the $16,000 and the $175,000 becomes $191,000 total assets at the bottom.

And then on the other side, liabilities and equity. We start off with liabilities, which is divided into both current and long-term, just like the assets. Accounts payable and taxes, subtotaled to $3,500. We have long-term liabilities of a mortgage and a loan, which subtotaled to $112,000. Add $3,500 and $112,000 and you get to $115,500. Owner’s equity — we have the initial investment by the owner of $5,000 and the total of the profits and the losses since the company began of $70,500. Add those up and we get to $75,500.

But wait, we’re missing just one thing. Now what we need to do is subtotal, or add, the $75,500 of owner’s equity with $115,500 of the liabilities to end up with $191,000. Double-underline, and magically that number is the same as this one ($191,000).

Congratulations, two done and one financial statement to go. Next up — the statement of cash flows.

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