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owners equity

Small Business Owner’s Equity Guide

If you’re a small business owner, you know that keeping track of all the moving parts can be challenging. Most small business owners keep track of their profit and loss statement, but the owner’s equity is equally important (and often overlooked).  

In this guide, we will explain what owner’s equity is and how to calculate it. We will also give tips on how to grow your equity and protect it from potential risks. 

What Is Owner’s Equity?

Owner’s equity is the portion of a business’s assets that the owner or shareholders possess. This applies to you, regardless of if your business is a sole proprietorship, partnership, or corporation.

Also, owner’s equity can be considered the residual value of a company’s assets after liabilities are paid. For example, if a business has assets of $100,000 and liabilities of $60,000, the owner’s equity will be $40,000.

Why Do Businesses Record Owner’s Equity?

No one wants to think about the end of their business which they have spent so much time and effort building. Yet, it is important to consider. Owner’s equity will give you some insight into the outcome of company liquidation. 

It represents the amount of money that would be left over for owners if the company was liquidated. If you sell your business, it will also be taken into consideration.

For corporations, owner’s equity is also a critical factor in determining a company’s stock price. The higher the equity, the more valuable the company is considered to be. 

Additionally, it can increase through profitability and investment. It can decrease through operating losses or share repurchases.

How you record equity can depend on the type of company structure. 

Sole Proprietorship

In a sole proprietorship, the owner and the company are one and the same. The owner of a sole proprietorship has complete control over the equity of the business. However, this also means that the owner is personally responsible for any debts or losses incurred. 

In a sole proprietorship, the owner’s equity is equal to the assets of the business minus any liabilities. 

Despite the overlap between personal and business for a sole proprietorship, it’s still best practice to maintain separate accounts.

Corporation

By contrast, a corporation is a separate legal entity from its owners. The owners of a corporation are known as shareholders or stockholders.

In a corporation, the shareholders own the equity of the company. This means that they have some control over how the assets of the business are used, but they are not personally liable for the debts of the business. 

But it also means, in the case of bankruptcy, that the owner’s equity is first used to pay off any outstanding liabilities of the company before being distributed to shareholders.

Ultimately, when it comes to ownership structure, it is up to each individual business to decide which type of structure is right for them.

What Do You Include in Owner’s Equity?

Owner’s equity is the portion of a business’s assets that are held by the business and not distributed to the owners. This can include various types of stock and retained earnings. 

The balance in the owner’s equity account will increase when the company makes a profit and decrease when the company sustains a loss. It can also be increased through investment in the business. 

When calculating owner’s equity, it is important to only include those assets that are owned by the business owner(s), whether they are shareholders or a sole proprietor. This means that any liabilities or expenses must be deducted from the total value of the assets. The result is the owner’s equity. 

It can be a positive or negative number, depending on whether the value of the assets exceeds the amount of the liabilities.

Also, it may include the following: 

  • Common Stock
  • Preferred Stock
  • Prior Years’ Retained Earnings 
  • Current Year Earnings
  • Less Current Year Distributions and Dividends

Examples of Owner’s Equity

There are several different types of owner’s equity, including common stock, preferred stock, retained earnings, and treasury stock. 

Common Stock

Common stock is the most basic type of ownership interest in a corporation and represents the residual claim on a company’s assets after all debts and liabilities have been paid. Preferred stock gives holders priority over common shareholders in terms of dividend payments and asset distribution in the event of liquidation. 

Retained Earnings

Retained earnings are typically profits that a company has reinvested back into the business instead of paying out as dividends. 

Treasury Stock

Treasury stock is stock that has been repurchased by the company and is not currently outstanding.

How to Calculate Owner’s Equity

If you own a company, it’s important to understand how to calculate your owner’s equity. This figure represents your personal investment in the business, and it can be a helpful tool for tracking the health of your company over time. 

To calculate your owner’s equity, simply subtract your total liabilities from your total assets. This will give you your equity stake in the business. Keep in mind that your equity can increase or decrease depending on your financial performance. If you’re looking to attract investors, strong equity can be a valuable selling point. 

  • Owner’s equity = Company’s assets – Company’s liabilities – Less funds withdrawn by owner(s)

By understanding how to calculate this figure, you can gain insights into the financial health of your business and make more informed decisions about its future.

Where Does Owner’s Equity Appear on the Balance Sheet?

It appears on the balance sheet as a positive number, representing the assets that the owner has put into the business. 

For publicly traded companies, the owner’s equity can be spotted on the balance sheet. Below is an example from a recently filed 10-Q for Caterpillar. In the example, you can see that the shareholders’ (owners’) equity is $15,759 million. This means that the combined investment by shareholders since the company’s inception is $15,759 million.

example of equity

Privately held companies will see the owner’s equity on the balance sheet below the liabilities as well. However, there are usually fewer categories included in the balance sheet of a privately held company.

Business owners could use their equity to pay for business expenses, buy new assets, or reinvest in the business. It can also be used as collateral for loans, to pay dividends to shareholders, or to buy back shares from shareholders. 

How to Increase Owner’s Equity

It can be increased in a number of ways, including reinvesting profits, reducing liabilities, and increasing the value of the assets.

Invest Additional Funds Into the Business

When a business is doing well, it can be tempting to just sit back and enjoy the fruits of your labor. However, if you want to continue to thrive, it’s important to reinvest some of your profits back into the business. 

This will help to increase your equity, which provides a cushion in case of tough times and can also help you finance growth opportunities. There are a number of ways to reinvest in your business, such as hiring new staff, investing in new equipment, or expanding your facilities. 

By taking the time to reinvest in your business, you can help ensure its long-term success.

Reduce Liabilities

It’s important to understand the relationship between liabilities and equity. Simply put, liabilities are what you owe, while equity is what you own. By reducing your liabilities, you increase your equity. 

Reducing liabilities can be accomplished in several ways, such as paying off debt or increasing your savings. Reducing your liabilities has a number of benefits. First, it frees up cash that can be used to grow the business. Second, it improves your credit rating, making it easier to get loans in the future. Finally, it reduces the amount of interest you owe, which can save you money in the long run. So if you’re looking to strengthen your business’s financial position, reducing liabilities is a good place to start.

Minimize Expenses

As a business owner, it’s important to keep an eye on your expenses. Not only will this help to improve your bottom line, but it will also increase your owner’s equity. 

By minimizing expenses, you can increase the amount of equity and make your business more attractive to potential lenders and investors. 

There are a number of ways to reduce expenses, including negotiating better terms with suppliers, cutting unnecessary costs, and increasing efficiency. However, before you can reduce expenses, you need to have a system for tracking them. You can use your accounting software, an app, or even a small business expense tracking spreadsheet

By taking a diligent approach to expense management, you can ensure that your business is financially viable. 

Do Not Take Distributions (Or Dividends)

One way to increase owner’s equity is to avoid distributions and dividends. This can be beneficial because it allows the company to reinvest its earnings and grow the business. In addition, it can help to build up a cushion of cash that can be used in case of unexpected expenses or opportunities. 

Of course, there are also downside risks associated with this strategy. If the company’s earnings decline, then equity will also decline. In addition, if the company needs to raise cash for any reason, then it may have to issue new equity or take on debt. As a result, this strategy should only be pursued if the company is in a strong financial position and has a solid plan for growth.

Equity is an important part of any business and should be considered when making decisions. By increasing it, you are putting yourself in a better position to run your business successfully. There are many ways to increase your equity and we have outlined some of the most common methods. 

If you still aren’t sure how to calculate and record owner’s equity (or if you just want some expert help), consider an online bookkeeping service. Xendoo’s bookkeeping plans come with balance sheets and can include equity figures as well as other financial reports. 

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

 

a person sitting at a desk looking at their chart of accounts

A Guide to the Chart of Accounts With Examples

Every business should have a chart of accounts. If you’re wondering what exactly that is, we have you covered. We’ll explain everything you need to know and include an example chart of accounts below.

Note, if you use Xendoo for your accounting, we can set up and maintain your chart of accounts for you. 

What Is the Chart of Accounts?

A chart of accounts is a list of all the accounts and financial transactions for your business in one location. It is like a table of contents for your accounting system. Accountants and business owners use the chart of accounts to organize how they make and spend money. 

By categorizing financial transactions, you can more easily create statements like balance sheets. Additionally, it shows you the big picture of your financial health and day-to-day operations. 

Chart of Accounts Types

As an example, a chart of accounts is usually organized into five main categories: 

  • Assets
  • Liabilities
  • Equity 
  • Expenses
  • Revenue

You or your accountant will use these account types to create a balance sheet and income statement. The balance sheet includes assets, liabilities, and equity accounts. On the other hand, the income statement includes revenue and expense accounts. 

  • Balance Sheet = Assets + Liabilities + Equity
  • Income Statement = Revenue + Expenses

Balance Sheet Chart of Accounts

Asset Accounts

Assets are resources a company owns and can use to produce value. These resources may be intangible assets like software or current assets like petty cash. Other examples of assets:

  • Accounts receivable
  • Equipment
  • Buildings 
  • Land
  • Vehicles

Liability Accounts

In general terms, liabilities are what your business owes. Transactions in a liability account include:

  • Accounts payable
  • Accrued expenses
  • Taxes payable
  • Customer deposits

Equity Accounts

Equity is the amount you have after deducting your liabilities from assets. The term equity is also used to describe a company’s value to shareholders. It makes sense then that equity in a chart of accounts includes the following: 

  • Common stock
  • Retained earnings
  • Preferred stock

Income Statement Chart of Accounts

Expense Accounts

Expenses are all the costs you incur in your business, whether it’s paying utility bills or employees. Other examples of common expenses include: 

  • Advertising
  • Bank fees
  • Rent 
  • Utilities
  • Travel

You’ll want to consider a business expense tracker to record and manage your expense accounts. It can also come in handy and save you money with business tax deductions

Revenue Accounts

You record from selling products or services in revenue accounts. Revenue also includes investment income and sales returns.

How Does the Chart of Accounts Work? 

Depending on your business, an example chart of accounts might be organized into specific columns that include: 

  • Reference numbers (Codes)
  • Account name
  • Account type 

When recording transactions in the charts of accounts, you assign reference or account numbers to entries. The number tells you which account a transaction belongs to based on the number’s first digit. 

If it begins with one, it is an asset transaction. Those that start with two, three, four, and five represent liability, equity, revenue, and expense transactions, respectively. 

For instance, asset accounts range from 100 to 199 while liability accounts are between 200 and 299. The account number in the chart of accounts varies with every business. 

Some charts of accounts use four digits instead of three, but the first digit remains the same. You can use four-digit codes—assets (1000 to 1999) and liability accounts (2000 to 2999).

You may also have a cost of goods sold (COGS). In that case, it is typically recorded with numbers starting with a five, and expenses are recorded starting with a six. 

Before there was accounting software, accountants used this coded method to organize the chart of accounts on paper. 

Most accounting software technologies automatically assign numbers (codes), making the entire process seamless. Accounting software also minimizes manual data entry by balancing your debits and credits for you. 

Chart of Accounts Examples

The following examples illustrate how a fictional business—XYZ—might record transactions in its chart of accounts. 

Transaction 1: A business XYZ withdraws $600 from its bank account to buy a heavy-duty printer. To accurately record the transaction, the business must credit $600 to their cash account and debit $600 to the equipment account.

Transaction 2: XYZ uses $2,000 to pay rent. In the chart of accounts, XYZ will credit $2,000 to the and debit $2,000 to the expense account for rent.

Transaction 3: The business owners in XYZ limited company bring in cash of $200,000 as additional capital. The business will credit the equity account and debit the cash account in the chart of accounts. 

Here’s a sample chart of accounts to give you a typical overview. Keep in mind that it is not exhaustive. Your chart of accounts will likely have slightly different codes and more accounts listed.

 

Account Number Account Name Type Financial Statement
1010 Cash Asset Balance Sheet
1200 Accounts receivable Asset Balance Sheet
1500 Office Equipment Asset Balance Sheet
2010 Accounts payable Liability Balance Sheet
2020 Sales tax payable Liability Balance Sheet
3010 Additional capital Equity Balance Sheet
3030 Retained earnings Equity Balance Sheet
4010 Sales  Revenue Income Statement
5010 Raw material Cost of Goods Sold Income Statement
6010  Advertising fees Expenses Income Statement
6020 Bank fees Expenses Income Statement
6030 Bad debt expense Expenses Income Statement

How Do You Update the Chart of Accounts? 

The rules for updating your chart of accounts are straightforward. Add new accounts throughout the year but wait till the year ends to delete old accounts. 

If you delete, merge, or rename accounts before the year ends, you can face troubles during tax season. 

You must make a double entry each time you record a transaction in the chart of accounts. Double-entry accounting is when you debit one account and credit another. The sum of the two entries must always be zero.

Suppose you own a hardware store and sell $1,000 of tools. You would debit the cash account $1,000 and credit the revenue account $1,000 on the charts of the account. 

You should also leverage accounting software like Quickbooks to automatically update your chart of accounts. Quickbooks can record debit and credit transactions automatically. It also has a chart of accounts template. You’ll want to be careful to choose the correct account type for each transaction. The account type will determine what transactions appear on the balance sheet and income statement. 

If you have Xendoo, you get Quickbooks and a team of expert bookkeepers and accountants to create your chart of accounts for you. If you don’t, you can get a free trial or schedule a call with a Xendoo accountant

 

This post is intended to be used for informational purposes only and does not constitute as legal, business, or tax advice. Please consult your attorney, business advisor, or tax advisor with respect to matters referenced in our content. Xendoo assumes no liability for any actions taken in reliance upon the information contained herein.

Lil Roberts on the Debutify podcast

Lil Roberts – Xendoo, Reshaping Bookkeeping, Accounting and Accountability

Today, we talked to Lil Roberts, CEO and founder of Xendoo, a cloud-based fintech company that specializes in online bookkeeping and accounting designed to give businesses of all sizes complete transparency with their financials, leading to actionable strategies throughout the entire year and not just tax season.

An Amazon sellersets up her accounting reports on her computer

8 Benefits of Online Bookkeeping

An Amazon sellersets up her accounting reports on her computer

You’ve put your heart and soul into your business. So why does it feel like you’re spinning your wheels, trying to keep up with your core business and your administrative overhead at the same time? 

When you first started your company, it might have made sense to try to handle your own bookkeeping and accounting needs. After all, it kept costs down. But it may not have taken long to realize that you could use some help.

 Why not rely on an online accounting service to take these tasks off your plate so you can focus on your business? 

Today, we’ll take a closer look at the business benefits of online bookkeeping and see how these services can help you to get your head out of the books and back in the game.

Business Benefits of Online Bookkeeping

Traditionally, businesses would hire a staff member to handle their books. They might even consider hiring a full-scale accounting department, depending on the size of their company. 

But these days, more and more companies are going digital, opting to use online accounting and bookkeeping services to handle their needs. This is happening for good reasons, as online bookkeeping offers a host of benefits. We’ll explore some of these benefits in depth below.

1. Specialized Experience

Today’s businesses require specialists, not generalists. Increased regulation and the unique needs of individual businesses often demand a specialized set of skills. It’s rare that a staff accountant has experience in the kinds of niche areas that your business needs.

Conversely, an online accounting firm can often provide experience in such areas as:

  • Personal financial planning and assistance
  • Forensic accounting
  • Managerial accounting
  • IT auditing
  • Non-profits
  • Tax preparation

Some of these tasks tend to be cyclical, such as your annual tax preparation. It makes sense to consult with an online accounting firm that can provide the services you need when you need them without the overhead of hiring a full-time CPA.

2. Accurate Books and Low Cost

One of the greatest business benefits of online bookkeeping is a reduction in cost. 

According to the Journal of Accountancy, the average salary for a full-time CPA is over $100,000 per year. The cost of a full-time bookkeeper is cheaper, but your business may still be looking at paying over $40,000 per year for their services, according to the U.S. Department of Labor Statistics.

Don’t forget that these salaries are only a starting point. Hiring a full-time employee also demands that you provide employment benefits. You may even have to make adjustments to your facilities in order to provide an office or similar workspace.

Time is another factor to consider. Who will be in charge of hiring and managing your employees? Unless you have a human resources department, these responsibilities might fall on your shoulders as the business owner. Sure, hiring a CPA means you won’t be handling the books, but instead, you’ll have the task of hiring an additional employee. 

Why swap one responsibility for another, when you can simply outsource your needs to an accounting firm?

Online bookkeeping services can be surprisingly affordable, eliminating the overhead associated with hiring a regular employee. 

By relying on an online solution for your financial needs, you won’t have to worry about diverting valuable space to set up an office or workstation, either, allowing you to cut costs in every imaginable capacity.

3. On-time Reporting

Staying on top of the details is a full-time job in and of itself. But the more information you have about your business, the better. As a business owner, you want access to trends like:

  • Losses
  • Profits
  • Tax information
  • Personnel and payroll data
  • Insurance payments
  • Procurement

Online bookkeeping ensures that you have access to the latest information, with reports available with unparalleled speed. This data is useful for highlighting areas of your business that could stand to be improved, which is why you need access to these reports in a timely manner. Since these reports are generated online, you’ll also save on paperwork.

In addition to internal reporting, online bookkeeping services can speed up your invoicing process. By streamlining your entire financial department, you’ll be in a better position to send invoices to clients and maintain your overall cash flow. 

Faster reporting can accelerate this process even further by monitoring your income and alerting you to clients that have outstanding payments that need to be collected.

In addition, virtual accounting services can help you to manage your inventory. Xendoo, for example, can help you integrate your platforms and inventory with software like Xero, which has a number of basic inventory management features, as well as other third-party platforms that can help you optimize your ability to keep track of your inventory. These tools can be a great help when it comes to keeping your shelves stocked and your orders flowing.

This increased efficiency doesn’t just save you a headache; it can help grow your business, too. Having access to the latest data increases the rate at which you can invoice clients and receive payments. 

The data you receive from an online bookkeeper can even help you plan for the future, which can be helpful when it comes to tasks like managing your inventory and looking for ways to expand your business.

4. Accurate Books

While a CPA typically has an advanced degree in addition to their certification, there are no advanced professional standards when it comes to bookkeeping. 

That’s not meant to be a slam against bookkeepers, as many of them do an excellent job. But if you try to cut corners by hiring a junior accountant or a financial novice, you could end up with errors creeping into your books. That’s also true if you try and handle the books yourself, especially since it’s unlikely you’ll be able to give your books your full, undivided attention.

Why is accuracy so important? For starters, accurate books can eliminate accounting errors. Maintaining accurate books can be essential for the efficient management of your business. 

But when it comes to tax preparation or other financial audits, accuracy is indispensable. Make an error in your tax forms, for example, and your business could be looking at penalties and additional fees that could otherwise be avoided.

Accuracy is one of the top business benefits of online bookkeeping. Accounting firms rely on the best bookkeepers in the industry, which ensures that businesses receive the benefit of meticulous, detail-oriented professionals to handle their books. In turn, this can ensure a smooth process when it comes time to prepare and pay your taxes.

If you’re concerned about the accuracy of your current books, an online accounting firm can perform an audit and troubleshoot your financials, ensuring you’re back on track for an error-free future.

Xendoo offers “catch-up bookkeeping” services that you can rely on to update your books so that you can keep things accurate. This can be particularly helpful for business owners that have been multitasking or ones that need a helping hand to stay current on their financial records. 

Ultimately, assigning your bookkeeping needs to an online firm can prevent errors from recurring in the future.

5. Expert Team

Virtual bookkeeping companies rely on the best and brightest bookkeepers that the industry has to offer. But the benefits of this go beyond accuracy and attention to detail. Having an expert team behind you can provide the confidence that your business can grow and that you’ll enjoy the dedicated support you need for any financial change.

 An expert team can be counted on to understand the best practices for modern bookkeeping. They will also be familiar with the latest financial software. With these tools, they can provide you with consistent, efficient reporting and expert financial analysis.

These expert-level skills would typically be out of reach for small business owners, as many lack the funds to invest in bookkeepers of this caliber. But online firms can provide you with top-tier care and insight at a mere fraction of the cost of hiring an employee, helping you balance quality and affordability with your financial needs.

6. Consistent Communication

Information is only as helpful as it is available. When you rely on a staff accountant, you’ll typically have access to financial data during normal business hours, which limits you to Monday through Friday from 9 to 5. But what if you need a piece of information when your staff accountant is “off the clock”?

Today’s business world doesn’t operate within the traditional 40-hour workweek. A global economy and a shift toward 24-hour customer service have placed new demands on business owners. You need a solution that matches these needs. 

Online accounting firms can fill this need by being available when you need their services the most, offering you consistent, regular communication through email, phone, and other channels.

 This kind of streamlined communication may be particularly helpful for business owners who have to travel often. Digital communication solutions can ensure that your accounting staff is right in your pocket, even when you’re out of the office—or even out of the country.

 In other words, a virtual financial team never clocks out and never takes a sick day. You can rely on online firms to provide you with the data you need when you need it most, so your business never has to slow down.

7. 24/7 Technology Platform

You’re probably already familiar with software like QuickBooks, but this is just the tip of a larger digital iceberg. Virtual accounting firms have access to the latest digital tools and software packages to help their clients optimize their business.

At Xendoo, we can sync your accounts and optimize your books using the following platforms:

  • Amazon
  • TaxJar
  • Gusto
  • Stripe
  • Shopify
  • Expensify
  • Bill.com

Of course, this list is always subject to change, which is one of the best business benefits of online bookkeeping. 

Virtual accounting firms can take advantage of the latest online bookkeeping features offered in these and other software platforms. Virtual firms also have the resources to keep up with changes in technology. 

By adapting and innovating, online accountants can ensure your business can continue to thrive and compete in an increasingly digital climate.

8. Personalized Support

Finally, there is simply no substitute for the personalized, custom support that you receive when you partner with an online bookkeeping service. The days of hiring a one-size-fits-all accountant are over. Modern businesses require the agility and personalization that come from a virtual firm.

An online accounting firm can adjust its areas of specialty to the needs of your business, providing solutions for the usual bookkeeping services as well as solutions for eCommerce, business software integration, and more. 

But perhaps most importantly, a virtual financial firm offers an array of services that can be tapped into as your business evolves and grows, so you can have the confidence that you’ll always have access to industry-leading services that are tailored to the needs of your business.

What Can Xendoo Do for You?

Are you ready to experience the business benefits of online bookkeeping for yourself? Why not consider what Xendoo can do for you and your business? Join high-profile businesses like Starbucks and Century 21 in trusting an industry leader to handle your books, prepare your taxes, generate reports, and perform a host of other financial services that are tailored to the unique demands of your business.

Xendoo offers flexible pricing based on the size of your business. We even provide scalable solutions to help your business to grow. Each plan includes standard bookkeeping services, as well as reporting on profits and loss and other data. 

Select plans include provisions for tax returns and consulting, which can be invaluable for businesses of any size.

Sign up for our free trial, and you’ll see how our advanced services can help your business. It’s time to stop handling your own books. Let us handle the details so that you can keep your focus on what matters:  Growing the business you love and connecting with the customers you’ve come to rely on.