In the past 10 years, two different and seemingly unrelated forces rocked our world. One was the internet, which has become popular and a household item. The other was the economic upheaval experienced by most of the countries on our planet.
The convergence of those two forces gave rise to another form of business, one that is not restricted by geographical area and is not made of brick and mortar. The home based business and ecommerce.
Many people who were laid off then found it hard to find other employment. When they were tired of searching, many came to the conclusion that they’d rather be their own boss and opened small businesses.
Alongside the freedom of running a business is the responsibility to understand your numbers. You might not like doing it, but accounting is part of running a business, and bookkeeping is the record keeping that enables accounting.
Knowing where you stand financially is an important part of having a sustainable business. Business owners have to educate themselves about accounting methods and the lingo. Especially if you want to grow the business and get outside financing, you will need to substantiate your business claims with numbers. Assets vs. liabilities and equity, are the framework on which a healthy business is built.
What are considered Assets? Assets are the different components that help the business owner make money. They are divided into two categories: Short term assets and long term assets.
Long term assets are the things that are meant to be there for a long time like the building, the furniture, the machinery used to produce the goods and the vehicles used for business.
Short term assets are cash on hand, investments, money owed to the business from customers, and inventory that was already paid for.
Assets are usually grouped in order of liquidity – the ease of converting them into cash.
What are considered liabilities? These are contractual obligations and payments owed by the business.
Short term liabilities – Operating expenses, current portion of long term debt, income tax, and payroll – all are considered short term liabilities because they will have to be paid within the next 12 months.
Long term liabilities – Are the debt obligations the business has that are not due for repayment in the next 12 months, like debt to financial institutions, mortgages, and bonds.
Every emerging business needs to be financed in some form or another. Some take loans from family and friends. There are loans from financial institutions or microloans. Others finance their business by themselves, either by investing money or investing time. The time you put into building the business is your initial investment.
Equity represents the value of the company to its owners and is the difference between total assets and total liabilities. It is sometimes referred to as Net Assets. Positive equity means that the company has more assets than liabilities and negative equity means the company is operating at a loss.
About the Author: Joyce Del Rosario, @Joycedelrosari2, is part of the team behind Open Colleges. It is one of Australia’s pioneer and leading providers of Accounting courses. When not working, Joyce enjoys blogging about health and finance.