Many have asked about what “equity” is; if you are one of the many who have wondered, you are not alone.
Simply put, the equity is the net worth of your business. In other words, if you sold everything in your business (all business assets) and used only those funds to pay off all the loans and outstanding bills (all business liabilities), what you would have left is the equity.
Sounds simple, right?
Documenting each asset and each liability correctly is the real crux of determining the business equity.
Assets are the things the business owns, like equipment. It is also the things owed to you, like the outstanding invoices your clients have yet to pay. Each needs to be posted accurately which involves various accounts and transactions beyond the typical “checkbook” type of accounting.
Meanwhile, your liabilities are those funds you owe to others, be they loans to pay on the fleet of vehicles or bills you have yet to pay for vendors. These also must be accurately recorded in various accounts.
Each document (ie: bill, loan agreement, invoice, payment, check, etc.) will have at least one, if not more than one, entry into your bookkeeping if done correctly. This is the best way to get the most accurate accounting of the true equity of your business.
Business accounting takes it one step further by adding things like goodwill and dividends complicates this further so the equity on your books is not the same as the sale value of your business! But that’s a topic for another time, dear reader…